Financial Returns or Social Impact? What Motivates Impact Investors’ Lending to Firms in Low-Income Countries (forthcoming in the Journal of Banking & Finance) (Link to Working Paper)
I analyze 70,000 transactions by retail impact investors on a peer-to-peer lending platform that intermediates loans to firms in low-income countries. Loans pay interest to investors and publicize indicators of expected social impact. Financial returns significantly influence investors’ decisions: a one percentage point increase in the interest rate increases funding speed seven-fold, investment probability two-fold and transaction size by 122 Euro. Expected social impact influences investors’ perception but has no influence (for female empowerment, employees and beneficiaries) or limited influence (for turnover) on investors’ funding decisions. When all available loans pay the same interest rates, female borrowers – but not firms with many employees or beneficiaries – are more likely to be chosen, suggesting that variation in financial returns can crowd out salient dimensions of social impact. The study implies that peer-to-peer lending platforms should function as gatekeepers of social impact and cannot outsource the evaluation of social impact to retail impact investors.
Work in Progress
Bad News Travel Fast … and Decrease Credit Supply in Peer-to-Peer Lending
Using a new dataset of transactions on a Dutch peer-to-peer lending platform, I investigate the stability of credit supply when investors experience repayment delays. I exploiting a natural experiment, where some investors experience repayment delays in impact investment loans and show that the delays cause aﬀected investors to decrease their credit supply by 206€ on average, resulting in a shortage of credit of almost 400,000€ to borrowers unconnected to the delays. Repayment delays thus have substantial negative externalities on the ability of ﬁrms to raise capital through the peer-to-peer lending platform.