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The mechanism and effectiveness of credit scoring of P2P lending platform: Evidence from Renrendai.com

Qiang Li (School of Management and Economics, University of Electronic Science and Technology of China, Chengdu, China)
Liwen Chen (School of Management and Economics, University of Electronic Science and Technology of China, Chengdu, China)
Yong Zeng (School of Management and Economics, University of Electronic Science and Technology of China, Chengdu, China)

China Finance Review International

ISSN: 2044-1398

Article publication date: 10 May 2018

Issue publication date: 30 July 2018

762

Abstract

Purpose

The purpose of this paper is to investigate the mechanism how the platform obtains and uses undisclosed information to determine individual borrowers’ credit score and to examine the effectiveness of credit scoring in predicting default. The motivation stems from the fact that there is little evidence about the role of P2P platform, which has been positioned as a kind of information intermediary.

Design/methodology/approach

Using a sample of 5,176 unsecured P2P loans having expired before December 31, 2015 on Renrendai.com and an approach of two-stage regression, the paper first estimates the undisclosed information embedded in credit score by regressing credit score on four types of public information about a borrower’s creditworthiness. Then, the authors use a Logit regression to examine the role of the excess information in predicting the default probability.

Findings

The certification information provided by the platform is the most important determinant for a borrower’s credit score and the undisclosed information embedded in credit score can predict the loan performance better than the public information of posted listings. Moreover, the predictive ability of the undisclosed information is better for high-risk borrowers than for low-risk ones.

Research limitations/implications

Providing a credit score for each individual is a way for P2P platforms to play an information intermediary role. More evidence about whether or how a platform plays its role are worthy to be exploited by investigating a platform’s operating policies in detail and doing cross-platform comparative studies.

Practical implications

The results about the effect of various types of information on loan performance can provide an insightful guidance for P2P platforms to optimize their mechanism on information disclosure and credit scoring.

Originality/value

The existing literature mainly focuses on the effects of information voluntarily disclosed by borrowers and the behaviors of investors on P2P lending outcomes. The paper highlights the information intermediary role played by the platform and presents empirical evidence that credit scoring for individual borrowers is a way for P2P platforms to promote the direct lending for individual.

Keywords

Acknowledgements

This research was benefitted from the comments and suggestions provided by anonymous editor as well as anonymous referees. Financial support from National Natural Science Foundation of China (Grant Nos of 71102054 and 71472025), Propaganda Department of the Communist Party of China (Grant No. of (2015)49) and University of Electronic Science and Technology of China (Grant No. of ZYGX2015J157) is gratefully acknowledged. All errors are those of the authors.

Citation

Li, Q., Chen, L. and Zeng, Y. (2018), "The mechanism and effectiveness of credit scoring of P2P lending platform: Evidence from Renrendai.com", China Finance Review International, Vol. 8 No. 3, pp. 256-274. https://doi.org/10.1108/CFRI-06-2017-0156

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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