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Lending to Small Businesses: The Role of Loan Maturity in Adressing Information Problems

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  • Ortiz-Molina, H.
  • Penas, M.F.

    (Tilburg University, Center for Economic Research)

Abstract

We investigate what determines the maturity of loans to small, informationally opaque businesses.We find that longer maturities are associated with collateral pledges, better financial condition, good credit history, and less informational opacity of the borrower.However, we do not find a positive association between stronger firm-creditor relationships (which can attenuate these information asymmetries) and longer maturities.The evidence suggests that creditors use shorter maturities to induce more frequent renegotiation of contract terms, thus enforcing closer monitoring of more informationally opaque and risky borrowers.Overall, our results are consistent with shorter loan maturities mitigating the consequences of borrower-lender informational asymmetries.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2004-99.

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Date of creation: 2004
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Handle: RePEc:dgr:kubcen:200499

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Web page: http://center.uvt.nl

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Keywords: small business; bank lending; loans; information;

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