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An Analysis of Standardized versus Relationship Bank Lending to Small Firms

Author

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  • Polly T. Hardee

    (University of Houston)

Abstract

Using the 1998 Survey of Small Business Finances and banking data to produce a bank-firm match, the author tests for evidence of standardized versus relationship lending methods in both total bank credit as well as credit emanating from the firm’s most important source of financial services, its primary bank. The author employs a two-step Heckman procedure to test the likelihood a small firm has bank debt, then conditional upon having debt, the level of credit outstanding. By comparing the determinates of bank and firm characteristics of primary bank credit with credit from all bank sources, the author finds relationship lending inherent within the primary bank, whereas competing bank sources employ standardized lending techniques such as credit scoring. Relating to credit availability, however, no clear dominance of one method over the other prevails, though empirical support is evident in primary banks providing more favorable credit conditions for riskier firms.

Suggested Citation

  • Polly T. Hardee, 2008. "An Analysis of Standardized versus Relationship Bank Lending to Small Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 12(3), pages 23-46, Summer.
  • Handle: RePEc:pep:journl:v:12:y:2008:i:3:p:23-46
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    Keywords

    Bank ; Bank Lending ; Firm ; Firms ; Lending;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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