Asymmetric Information and Corporate Lending: Evidence from SME Bond Markets*

Using a comprehensive dataset of Italian small and medium-sized enterprises, we find that differences between private and public information on firm creditworthiness affect the decision to issue bonds. Our evidence supports favorable (rather than adverse) selection in corporate bond markets. Specifically, holding public information constant, firms with better private fundamentals are more likely to access bond markets. These effects are weaker for opaque firms and stronger for firms with worse publicly observable risk. Additionally, credit conditions improve for issuers following the bond placement, compared with a matched sample of non-issuers. This is consistent with a model where banks offer more flexibility than markets during financial distress and firms use market lending to signal credit quality to outside stakeholders.