Is Lending by Banks and Non-banks Different? Evidence from Small Business Financing

Title
Is Lending by Banks and Non-banks Different? Evidence from Small Business Financing
Authors
Han, Joong H.
Issue Date
2008-11
Series/Report no.
KDI Working Paper Series;08-15
Abstract
This study empirically investigates whether banks and non-banks deal differently with the information scarcity of their borrowing firms. I analyze loan contracts to informationally opaque small businesses by introducing lender-borrower distance as a proxy for information availability. I find that the availability of bank loans is constrained by an increase in distance to borrowers while the availability of non-bank loans is not affected by such an increase. I also find that bank loan rates increase with the borrowers distance but non-bank loan rates are less likely to be constrained by distance to borrowers. These findings are consistent with the claim that banks are monitoring-specialized lenders that are constrained by the distance to their borrowers and price loans based on marginal monitoring costs that increase with distance. In contrast, non-banks use distinct lending technologies that are less dependent on firm-specific “soft” information. To shed light on the possible source of observed differences, this paper investigates non-banks specialization in asset-based lending. Lending capital goods instead of cash appears to be an important explanation for the difference in lending by banks and non-banks.
URI
http://archives.kdischool.ac.kr/handle/11125/17227
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