Like a Moth to a Flame: Does the Stock Market Exacerbate Credit Risks of Peer-to-Peer (P2P) Lending?

In this paper, we establish a causal link between fluctuations in the stock market and credit risks from the P2P lending market, by exploring information of more than 450 thousand loans on Renrendai.com, a leading Chinese P2P crowd lending platform. Based on the fact that retail investors exhibit a disproportional level of attention when the Shanghai Stock Exchange (SSE) composite index is above the 3,500 threshold, we find that both the default rate and the degree of delinquency have a disproportional jump for P2P loans borrowed above the 3,500 threshold of the SSE composite index. This effect is more pronounced when the loan quality is lower and when investors are more overconfident. Furthermore, when the SSE composite index exceeds 3,500, the overall creditworthiness of borrowers disproportionally deteriorates, indicated by higher interest rates, longer fulfill time needed to achieve the target loan amount, lower credit scores, and lower loan amounts. Overall, our results suggest that FinTech developments could amplify financial risks and hamper financial stability.