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The information revolution and small business lending: the missing evidence

  • Robert DeYoung
  • W. Scott Frame
  • Dennis C. Glennon
  • Peter Nigro

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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File URL: http://www.frbatlanta.org/documents/pubs/wp/wp1007.pdf
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Paper provided by Federal Reserve Bank of Atlanta in its series FRB Atlanta Working Paper with number 2010-07.

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Date of creation: 2010
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Handle: RePEc:fip:fedawp:2010-07
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  1. Jalal Akhavein & W. Scott Frame & Lawrence J. White, 2001. "The Diffusion of Financial Innovations: An Examination of the Adoption of Small Business Credit Scoring By Large Banking Organizations," Working Papers 01-08, New York University, Leonard N. Stern School of Business, Department of Economics.
  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 813-25, August.
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