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.