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Credit granting to small firms: A Brazilian case

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  • Zambaldi, Felipe
  • Aranha, Francisco
  • Lopes, Hedibert
  • Politi, Ricardo

Abstract

Transaction costs limit the supply of credit to small and medium-sized firms (SMEs). From a sample of 65,535 SME credit proposals submitted to a large Brazilian bank between January 2004 and September 2006, this research analyzes credit granting decisions. Results suggest that small firms face credit rationing and that low risk credit contracts with liquid collateral are their primary source of credit. Also, the bank captures private information through its lending relationships with borrowers, which affects its credit granting decisions. The findings reveal that the bank under study faces difficulties in expanding the supply of credit to small firms mainly because of cost, collateral-dependency and constraints due to asymmetric information.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Business Research.

Volume (Year): 64 (2011)
Issue (Month): 3 (March)
Pages: 309-315

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Handle: RePEc:eee:jbrese:v:64:y:2011:i:3:p:309-315

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Web page: http://www.elsevier.com/locate/jbusres

Related research

Keywords: Credit rationing Small and medium-sized enterprises (SMEs) Small business financing Asymmetric information Transaction costs;

References

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  1. Strahan, Philip E. & Weston, James P., 1998. "Small business lending and the changing structure of the banking industry1," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 821-845, August.
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  8. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 651-66, November.
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  11. Douglas W. Diamond, 1998. "Reputation Acquisition in Debt Markets," Levine's Working Paper Archive 602, David K. Levine.
  12. Bester,Helmut Hellwig,Martin, 1987. "Moral hazard and equilibrium credit rationing: An overview of the issues," Discussion Paper Serie A 125, University of Bonn, Germany.
  13. Ari Hyytinen & Lotta Väänänen, 2006. "Where Do Financial Constraints Originate from? An Empirical Analysis of Adverse Selection and Moral Hazard in Capital Markets," Small Business Economics, Springer, vol. 27(4), pages 323-348, December.
  14. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  15. John Ashton & Kevin Keasey, 2005. "Competition and the Provision of Banking Services to SMEs in the U.K," Small Business Economics, Springer, vol. 24(5), pages 477-485, 06.
  16. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, vol. 55(3), pages 1133-1161, 06.
  17. Melanie Feakins, 2004. "Commercial Bank Lending to SMEs in Poland," Small Business Economics, Springer, vol. 23(1), pages 51-70, 08.
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Cited by:
  1. Brenes, Esteban R. & Metzger, Michael & Requena, Bernardo, 2011. "Strategic management in Latin America: Issues and assessment," Journal of Business Research, Elsevier, vol. 64(3), pages 231-235, March.

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