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The Information Revolution and Small Business Lending: The Missing Evidence

Author

Listed:
  • Robert DeYoung
  • W. Frame
  • Dennis Glennon
  • Peter Nigro

Abstract

This paper provides empirical confirmation for Petersen and Rajan's (2002) widely accepted conjecture that information technology was the primary driver of the observed increase in small business borrower-lender distances in the United States in recent years. Using a different data source for small business loans, we show that annual increases in borrower-lender distances were slow and steady prior to 1993 (the end point in Petersen and Rajan's data) but accelerated rapidly after that. Importantly, we are able to assign at least half of this acceleration to the adoption of credit scoring technologies by the lending banks. Our tests also reveal strong statistical associations between lending distances and borrower characteristics, lender characteristics, market conditions, regulatory constraints, moral hazard incentives, and principal-agent incentives.
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Suggested Citation

  • Robert DeYoung & W. Frame & Dennis Glennon & Peter Nigro, 2011. "The Information Revolution and Small Business Lending: The Missing Evidence," Journal of Financial Services Research, Springer;Western Finance Association, vol. 39(1), pages 19-33, April.
    • Handle: RePEc:kap:jfsres:v:39:y:2011:i:1:p:19-33
    DOI: 10.1007/s10693-010-0087-2
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    References listed on IDEAS

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    1. Hans Degryse & Steven Ongena, 2005. "Distance, Lending Relationships, and Competition," Journal of Finance, American Finance Association, vol. 60(1), pages 231-266, February.
    2. Jalal Akhavein & W. Scott Frame & Lawrence J. White, 2005. "The Diffusion of Financial Innovations: An Examination of the Adoption of Small Business Credit Scoring by Large Banking Organizations," The Journal of Business, University of Chicago Press, vol. 78(2), pages 577-596, March.
    3. Frame, W Scott & Srinivasan, Aruna & Woosley, Lynn, 2001. "The Effect of Credit Scoring on Small-Business Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 813-825, August.
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    More about this item

    Keywords

    Borrower-lender distance; Credit scoring; Information technology; Small business lending; G21; O33;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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