Working Paper: NBER ID: w7685
Authors: Mitchell A. Petersen; Raghuram G. Rajan
Abstract: The distance between small firms and their lenders in the United States is increasing. Not only are firms choosing more distant lenders, they are also communicating with them in more impersonal ways. After documenting these systematic changes, we demonstrate that they do not stem from small firms locating differently, from simple consolidation in the banking industry, or from biases in the sample. Instead, they seem correlated with improvements in bank productivity. We conjecture that greater, and more timely, availability of borrower credit records, as well as the greater ease of processing these may explain the increased lending at a distance. Consistent with such an explanation, distant firms no longer have to be observably the highest quality credits, suggesting that a wider cross-section of firms can now obtain funding from a particular lender. These findings, we believe, are direct evidence that there has been substantial development of the financial sector in the United States, even in areas such as small business lending that have not been directly influenced by the growth in public markets. From a policy perspective, that small firms now obtain wider access to financing suggests the consolidation of banking services may not raise as strong anti-trust concerns as in the past.
Keywords: No keywords provided
JEL Codes: G20; G21; E50; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing distance between borrowers and lenders (G21) | improvements in bank productivity (O49) |
| better access to borrower credit records (G21) | ability to lend to riskier borrowers at a distance (G21) |
| advancements in processing technology (L63) | ability to lend to riskier borrowers at a distance (G21) |
| greater availability of timely information (G14) | reduction in information asymmetries (D82) |
| reduction in information asymmetries (D82) | lenders' ability to monitor riskier credits effectively (G21) |
| distance between small firms and lenders (G21) | creditworthiness (F34) |
| diminished predictive power of lender distance (G21) | ability of weaker credits to secure loans (E51) |
| improved information (D83) | lenders can manage risk better (G21) |