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Bank Structure and the Terms of Lending to Small Businesses

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Author Info
Rodrigo Canales () (MIT Sloan School of Management)
Ramana Nanda () (Harvard Business School, Entrepreneurial Management Unit)

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Abstract

Using loan-level data from Mexico, we study the relationship between the organizational structure of banks and the terms of lending to small businesses. We find that banks with decentralized lending structures - where branch managers have autonomy over the terms of lending - give larger loans to small firms and those with more "soft information" - particularly in states with weak legal enforcement of financial contracts. However, decentralized banks are also more responsive to the competitive environment when setting loan terms. They are more likely to restrict credit and to charge higher interests rates when they have market power, more so to smaller firms that have fewer outside options for external finance. These findings highlight a 'darker side' to decentralized banks and suggest that the relative benefit of a decentralized bank structure for small business lending depends critically on the nature of the competitive environment in which banks are located.

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Publisher Info
Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 08-101.

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Length: 35 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:hbs:wpaper:08-101

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Related research
Keywords: Banks; Institutions; Entrepreneurship;

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans and Credits
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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