Working Paper: CEPR ID: DP17003
Authors: Megha Patnaik
Abstract: Small businesses can overcome asymmetric information in credit markets using collateral and by forming lending relationships. Differences in whether a small business is predominantly "collateral-dependent" or "relationship-dependent" can lead to a differential impact of different types of credit shocks during recessions. I use novel transaction-level data from a leading online accounting software in the US for a large and representative sample of small businesses, for whom I measure two types of shocks at the firm level: bank insolvencies, and changes in real estate prices at the business owner's residential location. I find that bank insolvencies lead to a substantial decline in firm credit, however the effect is driven by the effects on relationship-dependent firms. In contrast, house price movements significantly affect the credit of collateral-dependent firms as expected, but do not affect the credit of firms that are predominantly dependent on relationships. The analysis thus reveals that credit shocks with different origins can have differential impact within the small business universe, due to heterogeneity in firms' sources of borrowing.
Keywords: Great Recession; Small Businesses; Credit Shocks
JEL Codes: G210; R310; D220
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank insolvencies (G33) | Asymmetric information loss (D82) |
| Asymmetric information loss (D82) | Decline in credit access for relationship-dependent firms (G21) |
| Bank insolvencies (G33) | Decline in credit access for relationship-dependent firms (G21) |
| House price movements (R31) | Credit of collateral-dependent firms (G32) |
| Bank insolvencies (G33) | No significant decline in credit access for collateral-dependent firms (G32) |