IDEAS home Printed from https://ideas.repec.org/a/eee/ememar/v37y2018icp47-65.html
   My bibliography  Save this article

SMEs' near-death experiences. Do local banks extend a helping hand?

Author

Listed:
  • Iwanicz-Drozdowska, Małgorzata
  • Jackowicz, Krzysztof
  • Kozłowski, Łukasz

Abstract

We investigate how the presence of local banks affects the prospects of troubled small and medium-sized enterprises (SMEs). Using a new dataset covering the years 2006–2015, we find evidence supporting the notion that local banks extend a helping hand to SMEs and act in this role efficiently. We establish that SMEs operating in regions where local banks hold a relatively strong position suffer losses less frequently, accumulate lower losses in relation to equity capital, report shorter series of losses, have a lower probability of legal bankruptcy or serious financial distress, and recover more easily from financial difficulties. Therefore, our study suggests that policies shaping the local structures of banking markets have a material impact on distressed SMEs' prospects.

Suggested Citation

  • Iwanicz-Drozdowska, Małgorzata & Jackowicz, Krzysztof & Kozłowski, Łukasz, 2018. "SMEs' near-death experiences. Do local banks extend a helping hand?," Emerging Markets Review, Elsevier, vol. 37(C), pages 47-65.
  • Handle: RePEc:eee:ememar:v:37:y:2018:i:c:p:47-65
    DOI: 10.1016/j.ememar.2018.05.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1566014117302923
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
    2. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 407-443.
    3. J. François Outreville, 2015. "The Relationship Between Relative Risk Aversion And The Level Of Education: A Survey And Implications For The Demand For Life Insurance," Journal of Economic Surveys, Wiley Blackwell, vol. 29(1), pages 97-111, February.
    4. Zhang, Xiao-mei & Song, Zhuo-lin & Zhong, Zhen, 2016. "Does “small bank advantage” really exist? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 368-384.
    5. Bonini, Stefano & Dell'Acqua, Alberto & Fungo, Matteo & Kysucky, Vlado, 2016. "Credit market concentration, relationship lending and the cost of debt," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 172-179.
    6. Beck, T.H.L. & Demirgüc-Kunt, A. & Martinez Peria, M., 2011. "Banking financing for SME's : Evidence across countries and bank ownership types," Other publications TiSEM c4d491c9-2cc6-40f6-ad55-a, Tilburg University, School of Economics and Management.
    7. Canales, Rodrigo & Nanda, Ramana, 2012. "A darker side to decentralized banks: Market power and credit rationing in SME lending," Journal of Financial Economics, Elsevier, vol. 105(2), pages 353-366.
    8. Behr, Patrick & Foos, Daniel & Norden, Lars, 2017. "Cyclicality of SME lending and government involvement in banks," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 64-77.
    9. Hasan, Iftekhar & Jackowicz, Krzysztof & Kowalewski, Oskar & Kozłowski, Łukasz, 2017. "Do local banking market structures matter for SME financing and performance? New evidence from an emerging economy," Journal of Banking & Finance, Elsevier, vol. 79(C), pages 142-158.
    10. Berger, Allen N. & Goulding, William & Rice, Tara, 2014. "Do small businesses still prefer community banks?," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 264-278.
    11. Berger, Allen N. & Klapper, Leora F. & Udell, Gregory F., 2001. "The ability of banks to lend to informationally opaque small businesses," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2127-2167, December.
    12. Bauer, Julian & Agarwal, Vineet, 2014. "Are hazard models superior to traditional bankruptcy prediction approaches? A comprehensive test," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 432-442.
    13. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    14. Berger, Allen N. & Black, Lamont K., 2011. "Bank size, lending technologies, and small business finance," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 724-735, March.
    15. repec:eee:jfinec:v:127:y:2018:i:1:p:174-196 is not listed on IDEAS
    16. Teng, Min & Si, Jiwen & Hachiya, Toyohiko, 2016. "Banking relationship, relative leverage and stock returns in Japan," Pacific-Basin Finance Journal, Elsevier, vol. 40(PA), pages 86-101.
    17. Honjo, Yuji, 2000. "Business failure of new firms: an empirical analysis using a multiplicative hazards model," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 557-574, May.
    18. Berger, Allen N. & Miller, Nathan H. & Petersen, Mitchell A. & Rajan, Raghuram G. & Stein, Jeremy C., 2005. "Does function follow organizational form? Evidence from the lending practices of large and small banks," Journal of Financial Economics, Elsevier, vol. 76(2), pages 237-269, May.
    19. Fukuda, Shin-ichi & Kasuya, Munehisa & Akashi, Kentaro, 2009. "Impaired bank health and default risk," Pacific-Basin Finance Journal, Elsevier, vol. 17(2), pages 145-162, April.
    20. Bates, Timothy, 2005. "Analysis of young, small firms that have closed: delineating successful from unsuccessful closures," Journal of Business Venturing, Elsevier, vol. 20(3), pages 343-358, May.
    21. Berger, Allen N. & Rosen, Richard J. & Udell, Gregory F., 2007. "Does market size structure affect competition? The case of small business lending," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 11-33, January.
    22. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
    23. Prilmeier, Robert, 2017. "Why do loans contain covenants? Evidence from lending relationships," Journal of Financial Economics, Elsevier, vol. 123(3), pages 558-579.
    24. Ongena, Steven & Smith, David C., 2001. "The duration of bank relationships," Journal of Financial Economics, Elsevier, vol. 61(3), pages 449-475, September.
    25. Berger, Allen N. & Klapper, Leora F. & Martinez Peria, Maria Soledad & Zaidi, Rida, 2008. "Bank ownership type and banking relationships," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 37-62, January.
    26. Shimizu, Katsutoshi, 2012. "Bankruptcies of small firms and lending relationship," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 857-870.
    27. Hale, Galina & Santos, João A.C., 2009. "Do banks price their informational monopoly?," Journal of Financial Economics, Elsevier, vol. 93(2), pages 185-206, August.
    28. Peter Back, 2005. "Explaining financial difficulties based on previous payment behavior, management background variables and financial ratios," European Accounting Review, Taylor & Francis Journals, vol. 14(4), pages 839-868.
    29. Berger, Allen N. & Saunders, Anthony & Scalise, Joseph M. & Udell, Gregory F., 1998. "The effects of bank mergers and acquisitions on small business lending," Journal of Financial Economics, Elsevier, vol. 50(2), pages 187-229, November.
    30. Imai, Kentaro, 2016. "A panel study of zombie SMEs in Japan: Identification, borrowing and investment behavior," Journal of the Japanese and International Economies, Elsevier, vol. 39(C), pages 91-107.
    31. Laitinen, Erkki K., 1999. "Predicting a corporate credit analyst's risk estimate by logistic and linear models," International Review of Financial Analysis, Elsevier, vol. 8(2), pages 97-121, June.
    32. Jose M. Liberti & Atif R. Mian, 2009. "Estimating the Effect of Hierarchies on Information Use," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4057-4090, October.
    33. repec:eee:finsta:v:33:y:2017:i:c:p:244-260 is not listed on IDEAS
    34. Jagtiani, Julapa & Kotliar, Ian & Maingi, Raman Quinn, 2016. "Community bank mergers and their impact on small business lending," Journal of Financial Stability, Elsevier, vol. 27(C), pages 106-121.
    35. Houston, Joel & James, Christopher, 1996. " Bank Information Monopolies and the Mix of Private and Public Debt Claims," Journal of Finance, American Finance Association, vol. 51(5), pages 1863-1889, December.
    36. Thorsten Beck & Asli Demirgüç-Kunt & María Pería, 2011. "Bank Financing for SMEs: Evidence Across Countries and Bank Ownership Types," Journal of Financial Services Research, Springer;Western Finance Association, vol. 39(1), pages 35-54, April.
    37. Farinha, Luisa A. & Santos, Joao A. C., 2002. "Switching from Single to Multiple Bank Lending Relationships: Determinants and Implications," Journal of Financial Intermediation, Elsevier, vol. 11(2), pages 124-151, April.
    38. repec:eee:jfinin:v:31:y:2017:i:c:p:16-29 is not listed on IDEAS
    39. Krzysztof Jackowicz & Lukasz Kozlowski, 2016. "Which Came First, the Chicken or the Egg? Banks and Firms on Local Banking Markets," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(3), pages 182-206, June.
    40. Stewart Thornhill & Raphael Amit, 2003. "Learning About Failure: Bankruptcy, Firm Age, and the Resource-Based View," Organization Science, INFORMS, vol. 14(5), pages 497-509, October.
    41. Lyandres, Evgeny & Zhdanov, Alexei, 2013. "Investment opportunities and bankruptcy prediction," Journal of Financial Markets, Elsevier, vol. 16(3), pages 439-476.
    42. Pindado, Julio & Rodrigues, Luis & de la Torre, Chabela, 2008. "Estimating financial distress likelihood," Journal of Business Research, Elsevier, vol. 61(9), pages 995-1003, September.
    43. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
    44. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    45. Sumit Agarwal, 2010. "Distance and Private Information in Lending," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2757-2788, July.
    46. repec:oup:rfinst:v:30:y:2017:i:10:p:3416-3454. is not listed on IDEAS
    47. 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.
    48. Beck, Thorsten & Degryse, Hans & De Haas, Ralph & van Horen, Neeltje, 2018. "When arm's length is too far: Relationship banking over the credit cycle," Journal of Financial Economics, Elsevier, vol. 127(1), pages 174-196.
    49. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1990. "The role of banks in reducing the costs of financial distress in Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 67-88, September.
    50. Hernandez Tinoco, Mario & Wilson, Nick, 2013. "Financial distress and bankruptcy prediction among listed companies using accounting, market and macroeconomic variables," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 394-419.
    51. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September.
    52. El Kalak, Izidin & Hudson, Robert, 2016. "The effect of size on the failure probabilities of SMEs: An empirical study on the US market using discrete hazard model," International Review of Financial Analysis, Elsevier, vol. 43(C), pages 135-145.
    53. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1891-1921, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Financial distress; Bankruptcy; Small and medium-sized enterprises; Local banks; Relationship banking;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ememar:v:37:y:2018:i:c:p:47-65. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/620356 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.