Borrower–lender distance and loan default rates: Macro evidence from the Italian local markets

• I examine borrower–lender physical and organizational distance effect on credit quality.
• I use macro data, from the Italian market, instead of the usual micro one.
• Increasing physical distance, proxy of soft information, reduces credit quality.
• Hard information mitigates the adverse effects of physical distance.
• Organizational distance affects credit quality in less developed regions.

I test the implications of borrower–lender physical and organizational distance for the loan default rate of Italian firms. I use a macro data set for the 1997–2011 period, which allows me to consider the effects of the international financial crisis too. I find that physical distance impedes information collection and monitoring and is inversely linked to credit quality. I also find that hard information can mitigate the adverse effects of physical distance on financing enterprises, showing the increasing importance of technological changes. Finally, I find evidence of the impact of organizational distance on default rates in less developed regions.