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Natural or unnatural selection? The end of lending relationships for small businesses

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  • Daisuke Tsuruta

Abstract

We investigate the situation where small business borrowers and banks end their lending relationships. If credit allocation is efficient, banks terminate their relationships with risky borrowers. Alternatively, small business borrowers are more likely to end their relationships when they have poor investment opportunities and do not require borrowed funds. However, if the soft budget constraints of banks or credit crunches are a significant problem, banks are likely to continue their relationships with risky firms or end their relationships with nonrisky firms, which is representative of an unnatural credit allocation. Using Japanese firm-level data, we show empirically that these relationships end naturally, with natural credit allocation supported even during the recent global financial crisis.

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  • Daisuke Tsuruta, 2016. "Natural or unnatural selection? The end of lending relationships for small businesses," Applied Economics, Taylor & Francis Journals, vol. 48(15), pages 1416-1428, March.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:15:p:1416-1428
    DOI: 10.1080/00036846.2015.1100262
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    Cited by:

    1. Tsuruta, Daisuke, 2020. "Japan's elderly small business managers: Performance and succession," Journal of Asian Economics, Elsevier, vol. 66(C).

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