Credit rationing in P2P lending to SMEs: Do lender-borrower relationships matter?

This paper studies the role of individual P2P investors that are acquainted with the borrower in mitigating credit rationing in P2P lending to SMEs. I use proprietary data provided by one of the biggest Dutch P2P lending platforms, on which personal acquaintances of the borrower are able to invest before other P2P investors do. I find that P2P investors invest more in loans of borrowers to whom they are personally acquainted. More initial investment by investors acquainted with the borrower is subsequently associated with a higher likelihood of obtaining a second loan from the P2P lender, larger investments by other P2P investors and lower ex post defaults. These results are consistent with informal lenders having superior information or monitoring skills and rational herding following informal investors' investment decisions.