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The Information Revolution and Small Business Lending: The Missing Evidence

Author

Listed:
  • Robert DeYoung

    ()

  • W. Frame

    ()

  • Dennis Glennon

    ()

  • Peter Nigro

    ()

Abstract

This 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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Suggested Citation

  • Robert DeYoung & W. Frame & Dennis Glennon & Peter Nigro, 2011. "The Information Revolution and Small Business Lending: The Missing Evidence," Journal of Financial Services Research, Springer;Western Finance Association, vol. 39(1), pages 19-33, April.
  • Handle: RePEc:kap:jfsres:v:39:y:2011:i:1:p:19-33
    DOI: 10.1007/s10693-010-0087-2
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    File URL: http://hdl.handle.net/10.1007/s10693-010-0087-2
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    References listed on IDEAS

    as
    1. Jalal Akhavein & W. Scott Frame & Lawrence J. White, 2005. "The Diffusion of Financial Innovations: An Examination of the Adoption of Small Business Credit Scoring by Large Banking Organizations," The Journal of Business, University of Chicago Press, vol. 78(2), pages 577-596, March.
    2. Frame, W Scott & Srinivasan, Aruna & Woosley, Lynn, 2001. "The Effect of Credit Scoring on Small-Business Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 813-825, August.
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    Citations

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    Cited by:

    1. Hughes, Joseph P. & Jagtiani, Julapa & Mester, Loretta J., 2016. "Is Bigger Necessarily Better in Community Banking?," Working Papers 17-03, University of Pennsylvania, Wharton School, Weiss Center.
    2. Anderson, Ronald W. & Jõeveer, Karin, 2012. "Bankers and bank investors: Reconsidering the economies of scale in banking," CEPR Discussion Papers 9146, C.E.P.R. Discussion Papers.
    3. Gregory F Udell, 2015. "SME Access to Intermediated Credit: What Do We Know and What Don't We Know?," RBA Annual Conference Volume,in: Angus Moore & John Simon (ed.), Small Business Conditions and Finance Reserve Bank of Australia.
    4. Knott, Samuel & Richardson, Peter & Rismanchi, Katie & Sen, Kallol, 2014. "Financial Stability Paper 31: Understanding the fair value of banks’ loans," Bank of England Financial Stability Papers 31, Bank of England.
    5. Elisa Cavezzali & Jacopo Crepaldi & Ugo Rigoni, 2014. "Proximity to hubs of expertise and financial analyst forecast accuracy," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 4(2), pages 157-179, December.
    6. Dmytro Holod & Joe Peek, 2013. "The value to banks of small business lending," Working Papers 13-7, Federal Reserve Bank of Boston.
    7. Dimitra Michala & Theoharry Grammatikos & Sara Ferreira Filipe, 2013. "Forecasting distress in European SME portfolios," LSF Research Working Paper Series 13-2, Luxembourg School of Finance, University of Luxembourg.
    8. W. Scott Frame & Lawrence J. White, 2009. "Technological change, financial innovation, and diffusion in banking," FRB Atlanta Working Paper 2009-10, Federal Reserve Bank of Atlanta.
    9. 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;Western Finance Association, vol. 39(1), pages 1-17, April.
    10. Berger, Allen N. & Goulding, William & Rice, Tara, 2013. "Do Small Businesses Still Prefer Community Banks?," International Finance Discussion Papers 1096, Board of Governors of the Federal Reserve System (U.S.).
    11. Joseph Hughes & Julapa Jagtiani & Loretta Mester & Choon-Geol Moon, 2018. "Does Scale Matter In Community Bank Performance? Evidence Obtained By Applying Several New Measures Of Performance," Departmental Working Papers 201803, Rutgers University, Department of Economics.
    12. Michala, Dimitra & Grammatikos, Theoharry & Ferreira Filipe, Sara, 2013. "Forecasting distress in European SME portfolios," EIF Working Paper Series 2013/17, European Investment Fund (EIF).
    13. Jagtiani, Julapa & Lemieux, Catharine, 2016. "Small Business Lending After the Financial Crisis: A New Competitive Landscape for Community Banks," Economic Perspectives, Federal Reserve Bank of Chicago, issue 3, pages 1-30.
    14. 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.
    15. Jagtiani, Julapa & Lemieux, Catharine, 2016. "Small business lending: challenges and opportunities for community banks," Working Papers 16-8, Federal Reserve Bank of Philadelphia.
    16. Ono, Arito & Saito, Yukiko & Sakai, Koji & Uesugi, Iichiro, 2016. "Does Geographical Proximity Matter in Small Business Lending? Evidence from Changes in Main Bank Relationships," HIT-REFINED Working Paper Series 40, Institute of Economic Research, Hitotsubashi University.
    17. Céline Meslier & Philippe Rous & Alain Sauviat & Pascale Torre, 2016. "Structure bancaire locale et évolution du crédit à l’échelle des départements français. L’expérience de la crise financière de 2007-2008," Revue économique, Presses de Sciences-Po, vol. 67(2), pages 279-314.
    18. repec:eee:intfin:v:50:y:2017:i:c:p:98-118 is not listed on IDEAS
    19. repec:bla:jfnres:v:40:y:2017:i:1:p:5-32 is not listed on IDEAS
    20. repec:kap:jfsres:v:51:y:2017:i:3:d:10.1007_s10693-016-0250-5 is not listed on IDEAS
    21. repec:luc:wpaper:13-2 is not listed on IDEAS
    22. O'Brien, Patricia C. & Tan, Hongping, 2015. "Geographic proximity and analyst coverage decisions: Evidence from IPOs," Journal of Accounting and Economics, Elsevier, vol. 59(1), pages 41-59.
    23. Jagtiani, Julapa & Lemieux, Catharine, 2016. "Small business lending: challenges and opportunities for community banks," Working Papers 16-8, Federal Reserve Bank of Philadelphia.

    More about this item

    Keywords

    Borrower-lender distance; Credit scoring; Information technology; Small business lending; G21; O33;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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