Seminar: Trust and Credit

Presenter: Stephan Siegel, Assistant Professor of Finance and Business Economics, University of Washington's Foster School of Business.

Summary:
Does it matter to individual lenders whether potential borrowers look trustworthy? Using data from a leading peer-to-peer lending site, we find that borrowers who appear more trustworthy receive more attention from lenders, have higher probabilities of having their loans funded, and, if funded, pay lower interest rates than borrowers who appear less trustworthy. Furthermore, we find that borrowers who appear more trustworthy are indeed more trustworthy in that they have better credit scores and default less often.

These findings are robust to controls for the borrowers' physical attractiveness, apparent wealth, and a large set of financial and demographic information about potential borrowers. Lastly, we find that while lenders charge borrowers who appear trustworthy lower rates than less trustworthy borrowers, lenders do not lower the rates enough to fully account for trustworthy borrowers lower default rates. As a result, loans to trustworthy borrowers yield expected returns 167 basis points higher than loans to less trustworthy borrowers.

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Biography: Stephan Siegel
Stephan Siegel is an assistant professor of finance and business economics at the University of Washington's Foster School of Business. He earned a B.S. from the University of Bayreuth and a Ph.D. in finance from Columbia University. Prior to his graduate studies, Stephan was a project manager with GCI Management, Munich, an international private equity and management consulting firm. His research interests are in international finance as well as individual investor behaviour. He has published his research in the Journal of Finance, the Journal of Financial Economics and the Review of Financial Studies.