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The importance of financial market development on the relationship between loan guarantees for SMEs and local market employment rates

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  • Craig E. Armstrong
  • Ben R. Craig
  • William E. Jackson, III
  • James B. Thomson

Abstract

We empirically examine whether a major government intervention in the small-firm credit market yields significantly better results in markets that are less financially developed. The government intervention that we investigate is SBA-guaranteed lending. The literature on financing small and medium size enterprises (SMEs) suggests that small firms may be exposed to a particular type of market failure associated with credit rationing. And SMEs in markets that are less financially developed will likely face a greater degree of this market failure. To test our hypothesis, we use the level of bank deposits per capita as our relative measure of financial market development, and we use local market employment rates as our measure of economic performance. After controlling for the appropriate cross-sectional market characteristics, we find that SBA-guaranteed lending has a significantly more (less) positive impact on the average annual level of employment when the local market is relatively less (more) financially developed. This result has important implications for public policy directives concerning where SBA-guaranteed lending should be directed.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1020.

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Date of creation: 2010
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Handle: RePEc:fip:fedcwp:1020

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Keywords: Small Business Administration ; Financial markets ; Small business - Finance ; Employment;

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References

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  1. Cowling, Marc & Mitchell, Peter, 2003. " Is the Small Firms Loan Guarantee Scheme Hazardous for Banks or Helpful to Small Business?," Small Business Economics, Springer, vol. 21(1), pages 63-71, August.
  2. Sherrill Shaffer, 1994. "Bank competition in concentrated markets," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 3-16.
  3. Wennekers, Sander & Thurik, Roy, 1999. " Linking Entrepreneurship and Economic Growth," Small Business Economics, Springer, vol. 13(1), pages 27-55, August.
  4. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  5. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  6. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  7. Ben R. Craig & William E. Jackson, III & James B. Thomson, 2004. "On SBA-guaranteed lending and economic growth," Working Paper 0403, Federal Reserve Bank of Cleveland.
  8. Sherrill Shaffer, 2006. "Establishment Size by Sector and County-Level Economic Growth," Small Business Economics, Springer, vol. 26(2), pages 145-154, 03.
  9. Marianne P. Bitler & Alicia M. Robb & John D. Wolken, 2001. "Financial services used by small businesses: evidence from the 1998 survey of small business finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 183-205.
  10. Shaffer, Sherrill, 2004. "Patterns of competition in banking," Journal of Economics and Business, Elsevier, vol. 56(4), pages 287-313.
  11. Ben R. Craig & William E. Jackson, III & James B. Thomson, 2005. "SBA guaranteed lending and local economic growth," Working Paper 2005-28, Federal Reserve Bank of Atlanta.
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