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Does function follow organizational form? evidence from the lending practices of large and small banks

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  • Allen N. Berger
  • Nathan H. Miller
  • Mitchell A. Petersen
  • Raghuran G. Rajan
  • Jeremy C. Stein

Abstract

Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally 'difficult' credits, such as firms that do not keep formal financial records. Moreover, controlling for the endogeneity of bank-firm matching, large banks lend at a greater distance, interact more impersonally with their borrowers, have shorter and less exclusive relationships, and do not alleviate credit constraints as effectively. All of this is consistent with small banks being better able to collect and act on soft information than large banks.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Proceedings with number 815.

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Length: 383-400
Date of creation: 2002
Date of revision:
Publication status: Published in Conference on Bank Structure and Competition (2002 : 38th) ; Financial market behavior and appropriate regulation over the business cycle
Handle: RePEc:fip:fedhpr:815

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Keywords: Bank loans ; Bank size ; Small business;

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References

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  1. help me, obi-wan bernanke. you’re my only hope!
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