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THE DETERMINANTS OF RISK PREMIUM: THE CASE OF BANK LINES OF CREDIT GRANTED TO SMEs

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  • JOSÉE ST-PIERRE

    ()
    (Université du Québec à Trois-Rivières, Institut de recherche sur les PME, 3351, Boulevard des Forges, Trois-Rivières (QC) Canada G9A 5H7, Canada)

  • MOUJIB BAHRI

    ()
    (Teluq-Université du Québec à Montréal, 100, Sherbrooke Ouest, Montréal (QC) Canada H2X 3P2, Canada)

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    Abstract

    The goal of this paper is to gain a better understanding of the factors that determine the risk premium on bank lines of credit obtained by SMEs, and whether firm size, which may be used by banks to segment their client base, also has an impact on credit costs. An analysis of data from 406 SMEs in Canada showed the main determinants of risk premium were firm size, line of credit size, ability to repay, the relationship between banker and entrepreneur, and the length of the relationship with the bank. These determinants change according to the market segment in which the potential borrower operates. Banks appear to use a transactional approach for smaller borrowers, where credit terms are based on quantitative financial data, and a relational approach for larger firms, where relationship length and quality become significant.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Journal of Developmental Entrepreneurship.

    Volume (Year): 16 (2011)
    Issue (Month): 04 ()
    Pages: 459-476

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    Handle: RePEc:wsi:jdexxx:v:16:y:2011:i:04:p:459-476

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    Related research

    Keywords: Bank financing; small business lending; risk indicators;

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    Cited by:
    1. Canton, E.J.F. & Grilo, I. & Monteagudo, J. & van der Zwan, P.W., 2012. "Perceived credit constraints in the European Union," ERIM Report Series Research in Management ERS-2010-001-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    2. Erik Canton & Isabel Grilo & Josefa Monteagudo & Peter Zwan, 2013. "Perceived credit constraints in the European Union," Small Business Economics, Springer, vol. 41(3), pages 701-715, October.

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