Evaluating the credit risk of SMEs using legal judgments

Abstract Loan application assessments of small and medium-sized enterprises (SMEs) are difficult because of information asymmetry. To mitigate the information asymmetry, this paper focuses on information found in legal judgments involving the company and its principles and combines this information with financial and firm-specific information to help evaluate the credit risk of SMEs. We propose a framework to identify legal judgments that are effective in predicting credit risk and extract relevant features that are contained within the effective legal judgments. Empirical evaluation shows that features extracted from effective legal judgments significantly improve the discrimination performance and granting performance of our model compared with the baseline model, which uses financial and firm-specific features only.