IDEAS home Printed from https://ideas.repec.org/p/fip/fedhfi/wp-97-22.html

A Trojan horse or the golden fleece? small business investment companies and government guarantees

Author

Listed:
  • William James Adams
  • Elijah Brewer
  • Hesna Genay
  • Paula R. Worthington

Abstract

Profitability is a central concern when governments provide guarantees to increase the flow of funds to disadvantaged groups. We examine the profitability of small business investment companies (SBICs) that are chartered and regulated by the U.S. Small Business Administration (SBA) to finance the activities of small firms. We document, over the 1986-91 period, dismal performance by SBICs. Because SBICs have access to government-guaranteed funds, financial distress among SBICs can expose the SBA, and hence taxpayers, to losses. Using two alternative sample selection models, we examine the relationship between SBICs use of SBA funds and returns on equity (ROE) and survival probabilities. The first sample selection model is based on a model of failure/survival. The second selection model is based on our observation that many SBICs do not take advantage of SBA leverage: nearly one-third of SBICs use no leverage at all, and that figure rises to three-fifths for bank-owned SBICs. The results from our sample selection models indicate that SBA leverage--the amount of funds borrowed from the SBA as a percent of private capital--reduces ROE and the probability of survival. In addition, we find that the probability of using SBA leverage decreases for bank-owned SBICs relative to other SBICs and for highly profitable and efficient SBICs, while it increases for SBICs using debt to finance the activities of small firms. Thus, our results suggest that an SBICs performance is negatively correlated with SBA leverage.

Suggested Citation

  • William James Adams & Elijah Brewer & Hesna Genay & Paula R. Worthington, 1997. "A Trojan horse or the golden fleece? small business investment companies and government guarantees," Working Paper Series, Issues in Financial Regulation WP-97-22, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhfi:wp-97-22
    as

    Download full text from publisher

    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/1997/wp97_22.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ronen, Joshua & Sorter, George H, 1972. "Relevant Accounting," The Journal of Business, University of Chicago Press, vol. 45(2), pages 258-282, April.
    2. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492, National Bureau of Economic Research, Inc.
    3. Robert B. Avery & Gerald A. Hanweck, 1984. "A dynamic analysis of bank failures," Research Papers in Banking and Financial Economics 74, Board of Governors of the Federal Reserve System (U.S.).
    4. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
    5. Berger, Allen N, 1995. "The Relationship between Capital and Earnings in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 432-456, May.
    6. Berger, Allen N, 1995. "The Profit-Structure Relationship in Banking--Tests of Market-Power and Efficient-Structure Hypotheses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 404-431, May.
    7. Jacobson, Robert, 1987. "The Validity of ROI as a Measure of Business Performance," American Economic Review, American Economic Association, vol. 77(3), pages 470-478, June.
    8. Elijah Brewer & Hesna Genay & William E. Jackson & Paula R. Worthington, 1996. "Performance and access to government guarantees: the case of small business investment companies," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 20(Sep), pages 16-32.
    9. Benston, George J, 1985. "The Validity of Profits-Structure Studies with Particular Reference to the FTC's Line of Business Data," American Economic Review, American Economic Association, vol. 75(1), pages 37-67, March.
    10. James R. Barth & R. Dan Brumbaugh & Daniel Sauerhaft & George Wang, 1985. "Thrift institution failures: causes and policy issues," Proceedings 68, Federal Reserve Bank of Chicago.
    11. William James Adams & Elijah Brewer & Hesna Genay & Paula R. Worthington, 1996. "The security issue decision: evidence from small business investment companies," Working Paper Series, Issues in Financial Regulation WP-96-27, Federal Reserve Bank of Chicago.
    12. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    13. Lynch, Lisa M, 1992. "Private-Sector Training and the Earnings of Young Workers," American Economic Review, American Economic Association, vol. 82(1), pages 299-312, March.
    14. Gregory R. Gajewski, 1989. "Assessing the risk of bank failure," Proceedings 250, Federal Reserve Bank of Chicago.
    15. Demirguc, Asli & Huizinga, Harry, 1999. "Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence," The World Bank Economic Review, World Bank, vol. 13(2), pages 379-408, May.
    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. Diana Hancock, 1996. "Measuring the efficiency of financial institutions: the importance of choosing a frontier," Proceedings 502, Federal Reserve Bank of Chicago.
    2. Jane W. D'Artista, 1996. "What should regulators do in the age of money managers?," Proceedings 488, Federal Reserve Bank of Chicago.
    3. Robin, Iftekhar & Salim, Ruhul & Bloch, Harry, 2018. "Financial performance of commercial banks in the post-reform era: Further evidence from Bangladesh," Economic Analysis and Policy, Elsevier, vol. 58(C), pages 43-54.
    4. J. S. Butler & Barry Schachter, 1996. "Improving value-at-risk estimates by combining kernel estimation," Proceedings 513, Federal Reserve Bank of Chicago.
    5. William J. Hanley & Karen McCann & James T. Moser, 1996. "Reconsidering regulatory standards for clearing and settlement systems," Proceedings 517, Federal Reserve Bank of Chicago.
    6. Osuagwu, Eze, 2014. "Determinants of Bank Profitability in Nigeria," MPRA Paper 60948, University Library of Munich, Germany.
    7. Yong Tan, 2018. "The Impacts of Competition and Risk on Profitability in Chinese Banking: Evidence from Boone Indicator and Stability Inefficiency," Annals of Economics and Finance, Society for AEF, vol. 19(2), pages 523-554, November.
    8. Djalilov, Khurshid & Piesse, Jenifer, 2016. "Determinants of bank profitability in transition countries: What matters most?," Research in International Business and Finance, Elsevier, vol. 38(C), pages 69-82.
    9. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Proceedings 512, Federal Reserve Bank of Chicago.
    10. John D. Hawke, 1996. "Bank structure and competition and pending legislation," Proceedings 484, Federal Reserve Bank of Chicago.
    11. Verne G. Istock, 1996. "The inevitability of consolidation," Proceedings 498, Federal Reserve Bank of Chicago.
    12. Gregory R. Duffee, 1996. "Rethinking risk management for banks: lessons from credit derivatives," Proceedings 514, Federal Reserve Bank of Chicago.
    13. Joel F. Houston & Christopher M. James, 1996. "Banking relationships, financial constraints, and investment: are bank- dependent borrowers more financially constrained?," Proceedings 506, Federal Reserve Bank of Chicago.
    14. Saif-Alyousfi, Abdulazeez Y.H. & Saha, Asish, 2021. "Do tourism receipts affect bank profitability? Analytical evidence from 85 tourism economies," Research in International Business and Finance, Elsevier, vol. 58(C).
    15. Stephen Brobeck, 1996. "Bank consolidation and the consumer," Proceedings 499, Federal Reserve Bank of Chicago.
    16. Gary Gorton & Andrew Winton, 1996. "The social costs of bank capital," Proceedings 518, Federal Reserve Bank of Chicago.
    17. Rebel A. Cole & Hamid Mehran, 1996. "The effect of changes in ownership structure on performance of public companies," Proceedings 495, Federal Reserve Bank of Chicago.
    18. Thomas K. Brown, 1996. "Bank consolidation and shareholder value," Proceedings 500, Federal Reserve Bank of Chicago.
    19. Glenn B. Canner & Wayne Passmore, 1996. "The relative profitability of commercial banks active in lending in lower-income borrowers," Proceedings 522, Federal Reserve Bank of Chicago.
    20. Charles W. Calomiris & Berry Wilson, 2004. "Bank Capital and Portfolio Management: The 1930s "Capital Crunch" and the Scramble to Shed Risk," The Journal of Business, University of Chicago Press, vol. 77(3), pages 421-456, July.

    More about this item

    Keywords

    ;

    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:fip:fedhfi:wp-97-22. See general information about how to correct material in RePEc.

    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: Lauren Wiese (email available below). General contact details of provider: https://edirc.repec.org/data/frbchus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.