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Distance, Lending Relationships, and Competition

  • Hans Degryse

    ()

    (Katholieke Universiteit Leuven and CentER for Economic Research)

  • Steven Ongena

    ()

    (CentER, Tilburg University)

A recent string of theoretical papers highlights the importance of geographical distance in explaining pricing and availability of loans to small firms. Lenders located in the vicinity of small firms have significantly lower monitoring and transaction costs, and hence considerable market power if competing financiers are located relatively far. We directly study the effect on loan conditions of the geographical distance between firms, the lending bank, and all other banks in the vicinity. For our study, we employ detailed contract information from more than 15,000 bank loans to small firms and control for relevant relationship, loan contract, bank branch, firm, and regional characteristics. We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending. Loan rates decrease in the distance between the firm and the lending bank and increase similarly in the distance between the firm and competing banks. Both effects are statistically significant and economically relevant, are robust to changes in model specifications and variable definitions, and are seemingly not driven by the modest changes over time in lending technology we infer.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 80.

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Date of creation: 01 Mar 2002
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Publication status: Published in Journal of Finance, 2005, vol. 60, pages 231-266
Handle: RePEc:sef:csefwp:80
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