IDEAS home Printed from https://ideas.repec.org/a/ucp/jnlbus/v78y2005i2p577-596.html
   My bibliography  Save this article

The Diffusion of Financial Innovations: An Examination of the Adoption of Small Business Credit Scoring by Large Banking Organizations

Author

Listed:
  • Jalal Akhavein

    (Moody's Risk Management Services)

  • W. Scott Frame

    (Research Department, Federal Reserve Bank of Atlanta)

  • Lawrence J. White

    (Stern School of Business, New York University)

Abstract

Financial innovation has been described as the "life blood of efficient and responsive capital markets." Yet, few quantitative investigations have studied financial innovations and the diffusion of these new technologies. In this paper, we examine the diffusion of one such technology: credit scoring models for small business lending. Using data for large banking organizations, our hazard model indicates that banking firms with more branches innovate earlier, as do those located in the New York Federal Reserve district. Our Tobit model confirms these results and finds that organizations with fewer separately chartered banks but more branches innovate earlier.

Suggested Citation

  • 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.
  • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:2:p:577-596
    DOI: 10.1086/427639
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/427639
    File Function: main text
    Download Restriction: Access to the online full text or PDF requires a subscription.

    File URL: https://libkey.io/10.1086/427639?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

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

    Other versions of this item:

    References listed on IDEAS

    as
    1. Oliver E. Williamson, 1967. "The Economics of Defense Contracting: Incentives and Performance," NBER Chapters, in: Issues in Defense Economics, pages 217-278, National Bureau of Economic Research, Inc.
    2. Jennifer F. Reinganum, 1981. "On the Diffusion of New Technology: A Game Theoretic Approach," Review of Economic Studies, Oxford University Press, vol. 48(3), pages 395-405.
    3. Nancy L. Rose & Paul L. Joskow, 1990. "The Diffusion of New Technologies: Evidence from the Electric Utility Industry," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 354-373, Autumn.
    4. Jennifer F. Reinganum, 1981. "Market Structure and the Diffusion of New Technology," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 618-624, Autumn.
    5. Gregory E. Elliehausen & John D. Wolken, 1990. "Banking markets and the use of financial services by small and medium- sized businesses," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 801-817.
    6. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-679, June.
    7. Garth Saloner & Andrea Shepard, 1995. "Adoption of Technologies with Network Effects: An Empirical Examination of the Adoption of Teller Machines," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 479-501, Autumn.
    8. 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.
    9. Van Horne, James C, 1985. "Of Financial Innovations and Excesses," Journal of Finance, American Finance Association, vol. 40(3), pages 621-631, July.
    10. Allen N. Berger & Lawrence G. Goldberg & Lawrence J. White, 2001. "The Effects of Dynamic Changes in Bank Competition on the Supply of Small Business Credit," Review of Finance, European Finance Association, vol. 5(1-2), pages 115-139.
    11. Drew Fudenberg & Jean Tirole, 1985. "Preemption and Rent Equalization in the Adoption of New Technology," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 383-401.
    12. Davies, Stephen W., 1979. "Inter-firm diffusion of process innovations," European Economic Review, Elsevier, vol. 12(4), pages 299-317, October.
    13. 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.
    14. Cohen, Wesley M. & Levin, Richard C., 1989. "Empirical studies of innovation and market structure," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 18, pages 1059-1107, Elsevier.
    15. Sharon Oster, 1982. "The Diffusion of Innovation among Steel Firms: The Basic Oxygen Furnace," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 45-56, Spring.
    16. Josh Lerner, 2000. "Where Does State Street Lead? A First Look at Finance Patents, 1971-2000," NBER Working Papers 7918, National Bureau of Economic Research, Inc.
    17. Massoud Karshenas & Paul L. Stoneman, 1993. "Rank, Stock, Order, and Epidemic Effects in the Diffusion of New Process Technologies: An Empirical Model," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 503-528, Winter.
    18. John D. Finnerty, 1992. "An Overview Of Corporate Securities Innovation," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 23-39, January.
    19. Cole, Rebel A., 1998. "The importance of relationships to the availability of credit," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 959-977, August.
    20. Miller, Merton H., 1986. "Financial Innovation: The Last Twenty Years and the Next," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(4), pages 459-471, December.
    21. Timothy H. Hannan & John M. McDowell, 1984. "The Determinants of Technology Adoption: The Case of the Banking Firm," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 328-335, Autumn.
    22. Merton H. Miller, 1992. "Financial Innovation: Achievements And Prospects," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 4-11, January.
    23. Robert C. Merton, 1992. "Financial Innovation And Economic Performance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 12-22, January.
    24. Baptista, Rui, 2000. "Do innovations diffuse faster within geographical clusters?," International Journal of Industrial Organization, Elsevier, vol. 18(3), pages 515-535, April.
    25. Berger, A.N. & Goldberg, L.G. & White, L.J., 2001. "The Effects of Dynamic Change in Bank Competition on the Supply of Small Business Credit," New York University, Leonard N. Stern School Finance Department Working Paper Seires 01-07, New York University, Leonard N. Stern School of Business-.
    26. Garbade, Kenneth D & Silber, William L, 1978. "Technology, Communication and the Performance of Financial Markets: 1840-1975," Journal of Finance, American Finance Association, vol. 33(3), pages 819-832, June.
    27. Faulhaber, Gerald R & Baumol, William J, 1988. "Economists as Innovators: Practical Products of Theoretical Research," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 577-600, June.
    28. Loretta J. Mester, 1997. "What's the point of credit scoring?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-16.
    29. W. Scott Frame & Michael Padhi & Lynn W. Woosley, 2001. "The effect of credit scoring on small business lending in low- and moderate-income areas," FRB Atlanta Working Paper 2001-6, Federal Reserve Bank of Atlanta.
    30. Hannan, Timothy H & McDowell, John M, 1987. "Rival Precedence and the Dynamics of Technology Adoption: An Empirical Analysis," Economica, London School of Economics and Political Science, vol. 54(214), pages 155-171, May.
    31. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. W. Scott Frame & Lawrence J. White, 2004. "Empirical Studies of Financial Innovation: Lots of Talk, Little Action?," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 116-144, March.
    2. 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.
    3. Rui Baptista, 1999. "The Diffusion of Process Innovations: A Selective Review," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(1), pages 107-129.
    4. Blackman, Allen, 1999. "The Economics of Technology Diffusion: Implications for Climate Policy in Developing Countries," Discussion Papers 10574, Resources for the Future.
    5. Lawrence J. White, "undated". "Technological Change, Financial Innovation, and Financial Regulation: The Challenges for Public Policy," Center for Financial Institutions Working Papers 97-33, Wharton School Center for Financial Institutions, University of Pennsylvania.
    6. Suzi Kerr & Richard G. Newell, 2003. "Policy‐Induced Technology Adoption: Evidence from the U.S. Lead Phasedown," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 317-343, September.
    7. Durguner, Sena, 2017. "Do borrower-lender relationships still matter for small business loans?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 98-118.
    8. David P. Ely & Kenneth J. Robinson, 2004. "The impact of banks' expanded securities powers on small‐business lending," Review of Financial Economics, John Wiley & Sons, vol. 13(1-2), pages 79-102.
    9. Stoneman, Paul & Battisti, Giuliana, 2010. "The Diffusion of New Technology," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 2, chapter 0, pages 733-760, Elsevier.
    10. Espen Bratberg & Alf Erling Risa, 1995. "Technological Diffusion Through Profit Seeking And Epidemic Information Processes," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 4(1), pages 27-40.
    11. W. Scott Frame & Michael Padhi & Lynn W. Woosley, 2001. "The effect of credit scoring on small business lending in low- and moderate-income areas," FRB Atlanta Working Paper 2001-6, Federal Reserve Bank of Atlanta.
    12. Casey Ichniowski & Kathryn Shaw, 1995. "Old Dogs and New Tricks: Determinants of the Adoption of Productivity-Enhancing Work Practices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995 Micr), pages 1-65.
    13. Parhi, Mamata, 2005. "Diffusion of New Technology in Indian Auto Component Industry: An Examination of the Determinants of Adoption," UNU-INTECH Discussion Paper Series 2005-08, United Nations University - INTECH.
    14. Degryse, H.A. & Cerqueiro, G.M. & Ongena, S., 2007. "Distance, Bank Organizational Structure and Credit," Other publications TiSEM 34c2f607-3395-4fd9-9c52-4, Tilburg University, School of Economics and Management.
    15. Katja Seim & V. Brian Viard, 2011. "The Effect of Market Structure on Cellular Technology Adoption and Pricing," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 221-251, May.
    16. Das Nilotpal & Falaris Evangelos M & Mulligan James G, 2009. "Vintage Effects and the Diffusion of Time-Saving Technological Innovations," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-37, June.
    17. Yehning Chen & Rachel Huang & John Tsai & Larry Tzeng, 2015. "Soft Information and Small Business Lending," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(1), pages 115-133, February.
    18. Beck, Thorsten & Chen, Tao & Lin, Chen & Song, Frank M., 2016. "Financial innovation: The bright and the dark sides," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 28-51.
    19. Ergungor, O. Emre, 2005. "The profitability of bank-borrower relationships," Journal of Financial Intermediation, Elsevier, vol. 14(4), pages 485-512, October.
    20. Bos, Jaap W.B. & Kolari, James W. & van Lamoen, Ryan C.R., 2013. "Competition and innovation: Evidence from financial services," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1590-1601.

    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

    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:ucp:jnlbus:v:78:y:2005:i:2:p:577-596. 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: . General contact details of provider: https://www.jstor.org/journal/jbusiness .

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.jstor.org/journal/jbusiness .

    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.