The information revolution and small business lending: the missing evidence
AbstractThis 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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Bibliographic InfoPaper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2010-07.
Date of creation: 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-17 (All new papers)
- NEP-BAN-2010-04-17 (Banking)
- NEP-BEC-2010-04-17 (Business Economics)
- NEP-CTA-2010-04-17 (Contract Theory & Applications)
- NEP-ENT-2010-04-17 (Entrepreneurship)
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- Allen Berger & Adrian Cowan & W. Frame, 2011. "The Surprising Use of Credit Scoring in Small Business Lending by Community Banks and the Attendant Effects on Credit Availability, Risk, and Profitability," Journal of Financial Services Research, Springer, vol. 39(1), pages 1-17, April.
- Dmytro Holod & Joe Peek, 2013. "The value to banks of small business lending," Working Papers 13-7, Federal Reserve Bank of Boston.
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