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Market power and relationships in small business lending

  • Elizabeth Laderman
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    The empirical research literature regarding the effects of market structure on small business lending has yielded ambiguous results. This paper empirically tests for the presence of countervailing effects of increases in market concentration on small business loan volume. Countervailing effects would be expected if both the traditional Structure, Conduct, Performance (SCP) paradigm of industrial organization and a paradigm whereby market power benefits the formation of lending relationships (the relationship hypothesis), are at work. Using Community Reinvestment Act (CRA) data on small loans to small businesses, it is found that, on average, across MSAs, SCP effects dominate. But, as predicted by the relationship hypothesis, the negative effects of increases in concentration on small business loan volume are weaker, the greater the presence of young firms and the higher the business failure rate. Relationship effects due to business failure appear to come from highly concentrated MSAs. Endogeneity concerns are further addressed with the estimation of a regression that separates out the effects of changes in the number of lenders from the effects of changes in the sum of squared deviations of market shares.

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    File URL: http://www.frbsf.org/publications/economics/papers/2007/wp07-07bk.pdf
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    Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-07.

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    Date of creation: 2006
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    Handle: RePEc:fip:fedfwp:2007-07
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    1. Paola Sapienza, 2002. "The Effects of Banking Mergers on Loan Contracts," Journal of Finance, American Finance Association, vol. 57(1), pages 329-367, 02.
    2. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
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    4. Stephen A. Rhoades, 1992. "Evidence on the size of banking markets from mortgage loan rates in twenty cities," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 117-118.
    5. Nicola Cetorelli, 2004. "Real effects of bank competition," Working Paper Series WP-04-03, Federal Reserve Bank of Chicago.
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    7. Berger, Allen N. & Saunders, Anthony & Scalise, Joseph M. & Udell, Gregory F., 1998. "The effects of bank mergers and acquisitions on small business lending," Journal of Financial Economics, Elsevier, vol. 50(2), pages 187-229, November.
    8. Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May.
    9. Richard J. Rosen, 2003. "Banking market conditions and deposit interest rates," Working Paper Series WP-03-19, Federal Reserve Bank of Chicago.
    10. Nicola Cetorelli & Philip Strahan, 2004. "Finance as a barrier to entry: bank competition and industry structure in local U.S. markets," Working Paper Series WP-04-04, Federal Reserve Bank of Chicago.
    11. Rebecca Zarutskie, 2003. "Does bank competition affect how much firms can borrow? new evidence from the U.S," Proceedings 856, Federal Reserve Bank of Chicago.
    12. Alicia M. Robb, 2002. "Small Business Financing: Differences Between Young and Old Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 7(2), pages 45-64, Summer.
    13. Mamie Marcuss, 2004. "Are small businesses concerned about credit?," Communities and Banking, Federal Reserve Bank of Boston, issue Fall, pages 22-24.
    14. Mark J. Garmaise & Tobias J. Moskowitz, 2004. "Bank Mergers and Crime: The Real and Social Effects of Credit Market Competition," NBER Working Papers 11006, National Bureau of Economic Research, Inc.
    15. Robert Avery & Katherine Samolyk, 2004. "Bank Consolidation and Small Business Lending: The Role of Community Banks," Journal of Financial Services Research, Springer, vol. 25(2), pages 291-325, April.
    16. Stephen A. Rhoades, 1992. "Evidence on the size of banking markets from mortgage loan rates in twenty cities," Staff Studies 162, Board of Governors of the Federal Reserve System (U.S.).
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