Working Paper: NBER ID: w8752
Authors: Allen N. Berger; Nathan H. Miller; Mitchell A. Petersen; Raghuram G. Rajan; Jeremy C. Stein
Abstract: Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally 'difficult' credits, such as firms that do not keep formal financial records. Moreover, controlling for the endogeneity of bank-firm matching, large banks lend at a greater distance, interact more impersonally with their borrowers, have shorter and less exclusive relationships, and do not alleviate credit constraints as effectively. All of this is consistent with small banks being better able to collect and act on soft information than large banks.
Keywords: No keywords provided
JEL Codes: D21; D23; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger banks (G21) | Less willingness to lend to firms with informational difficulties (G21) |
| Larger banks (G21) | Lend at greater distances (F34) |
| Larger banks (G21) | Reliance on hard information (D83) |
| Small banks (G21) | Stronger bank-firm relationships (G21) |
| Small firms (L25) | Greater credit constraints when relying on larger banks (G21) |
| Bank size (G21) | Quality of information produced (L15) |
| Bank size (G21) | Nature of bank-firm interactions (G21) |
| Bank size (G21) | Implications for credit availability (G21) |