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Assessing the Profitability and Riskiness of Small Business Lenders in the Banking Industry

Author

Listed:
  • James W. Kolari

    (Texas A&M University)

  • Charles C. Ou

    (Office of Economic Research, Office of Advocacy, U.S. Small Business Administration)

  • G. Hwan Shin

    (University of Texas at Tyler)

Abstract

Two alternatives research hypotheses concerning how small business lending affects bank profitability are tested. The specialization hypothesis argues for higher profitability than other banks due to increased focus on small business lending, whereas the diversification hypothesis asserts that small business lenders' profitability will be lower than other more diversified banks. Using the rate of return on assets as the profit measure, we find that small business exposure tends to have neutral or positive effects on bank profitability after taking into account bank risk. Using efficient frontier analyses that focus on the rate of return on equity, we find that business lenders reap benefits from specialization, particularly in terms of reducing failure risk. We conclude that the evidence supports the specialization hypothesis.

Suggested Citation

  • James W. Kolari & Charles C. Ou & G. Hwan Shin, 2006. "Assessing the Profitability and Riskiness of Small Business Lenders in the Banking Industry," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 11(2), pages 1-26, Summer.
  • Handle: RePEc:pep:journl:v:11:y:2006:i:2:p:1-26
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    References listed on IDEAS

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    Cited by:

    1. Goddard, John & McKillop, Donal & Wilson, John O.S., 2008. "The diversification and financial performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1836-1849, September.

    More about this item

    Keywords

    Bank; Banking; Risk; Lending; Small Business;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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