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Problems of Evaluating Small Firms’ Quality as a Reason for Unfavourable Loan Conditions

  • Ingrid Groessl

    (HWP-Hamburger Universität für Wirtschaft und Politik)

  • Nadine Levratto

The article substantiates the hypothesis that the profitability of small firms is above all determined by qualitative variables. In this respect a low standardization of goods and even more importantly, the high significance of governance structures play a crucial role rendering the quality of the firm’s human capital, the flexibility of its machinery but also externalities of business networks, an appropriate integration of the family into business affairs as examples of qualitative information which also bear a high degree of privacy. Whereas the literature suggests relational contracts as a way how qualitative and private information can be credibly conveyed to the lender, it is shown that even in the German housebank-dominated financial system borrower- lender relationships of the kind recommended by the literature are hardly to be found. Rather, German banks, too, respond to information gaps with unfavourable loan conditions. As an alternative specialized information intermediation is briefly discussed.

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File URL: http://128.118.178.162/eps/fin/papers/0406/0406014.pdf
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Paper provided by EconWPA in its series Finance with number 0406014.

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Length: 20 pages
Date of creation: 24 Jun 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0406014
Note: Type of Document - pdf; pages: 20
Contact details of provider: Web page: http://128.118.178.162

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  1. Rees, Ray, 1985. "The Theory of Principal and Agent: Part 1," Bulletin of Economic Research, Wiley Blackwell, vol. 37(1), pages 3-26, January.
  2. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August.
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  4. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
  5. Paranque Bernard, 2003. "Quelle « Intermédiation Informationnelle » pour les PME ? ou comment une démarche théorique a fertilisé une évolution stratégique," Finance 0306005, EconWPA.
  6. Gorton, G. & Khan, J., 1992. "The Design of Bank Loan Contracts, Collateral, and Renegociation," RCER Working Papers 327, University of Rochester - Center for Economic Research (RCER).
  7. 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 351-81, July.
  8. Harhoff, Dietmar & Korting, Timm, 1998. "Lending relationships in Germany - Empirical evidence from survey data," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1317-1353, October.
  9. 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.
  10. Boot, Arnoud W A & Thakor, Anjan V, 1994. "Moral Hazard and Secured Lending in an Infinitely Repeated Credit Market Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 899-920, November.
  11. Salais, Robert & Storper, Michael, 1992. "The Four 'Worlds' of Contemporary Industry," Cambridge Journal of Economics, Oxford University Press, vol. 16(2), pages 169-93, June.
  12. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
  13. Ingrid Größl & Peter Stahlecker & Eckhardt Wohlers, 2001. "An Empirical Investigation of German Firms' Financial Structure and Ensuing Risks," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 221(5-6), pages 491-529.
  14. Rees, Ray, 1985. "The Theory of Principal and Agent: Part 2," Bulletin of Economic Research, Wiley Blackwell, vol. 37(2), pages 75-95, May.
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