Is Lending by Banks and Non-banks Different? Evidence from Small Business Financing
- Is Lending by Banks and Non-banks Different? Evidence from Small Business Financing
- Han, Joong H.
- Issue Date
- Series/Report no.
- KDI Working Paper Series;08-15
- 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.
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