Credit ratings, relationship lending and loan market efficiency

Abstract

Purpose Using the small-business loan market, this paper aims to test whether a structural shift in access to borrowers’ financial information (i.e. credit ratings) improves market efficiency, thereby improving entrepreneurs’ access to external capital. Design/methodology/approach This research uses the National Survey of Small Business Finance in a conditional logistic regression framework to tease out the marginal propensity to grant lines of credit given the firm’s credit rating – treating both of the events, namely, line of credit and credit ratings, as endogenous variables. This methodology overcomes potential reverse causality issues. Findings The results show that information brokers have allowed small firms to break away from long-term monopolistic lending relationships, thus contributing to more informationally efficient markets. Small businesses benefit from better-informed lenders by having better access to capital. Also, women appear less likely to receive a line of credit even after adjusting for credit ratings. Practical implications This research highlights the importance of credit report awareness/monitoring by entrepreneurs, as the small-business credit rating grows rapidly. Relationship lending is not enough to reach optimal financing costs. These papers call for more regulated credit ratings industry to reduce potential moral hazards. Originality/value This paper tests whether bank lending relationships (soft information) still matter after accounting for credit ratings (hard information). Additionally, this study measures the extent to which information sharing by data services bureaus, a proxy for informational efficiency, has increased allocation efficiency in the small-business loan market.

Bank competition and SMEs access to finance in India: evidence from World Bank Enterprise Survey

“…Ryan et al. , 2014; Leon, 2015; Bauer and Esqueda, 2017; Ayalew and Xianzhi, 2019; Wang et al ., 2020; Nguyen et al ., 2022). However, we acknowledge that these control variables are added subject to some limits and considerations.…”

“…We select the control variables based on the theoretical foundation of factors affecting firm's credit availability and by following the previous cross-sectional literature in relevance to SME's access to finance (e.g. Ryan et al, 2014;Leon, 2015;Bauer and Esqueda, 2017;Ayalew and Xianzhi, 2019;Wang et al, 2020;Nguyen et al, 2022). However, we acknowledge that these control variables are added subject to some limits and considerations.…”

The impact of working capital management on credit rating

“…Furthermore, investors are highly concerned about borrowers' ability to fulfil their obligations (Haspolat 2015). In this regard, Bauer and Esqueda (2017) point out the importance of credit rating scales in helping banks overcome information deficits when making loan decisions.…”

A territorial perspective of SME’s default prediction models

“…In this regard, some studies, in addition to financial indicators (Lukason et al, 2016), have tested the predictive power of the characteristics of the firm (Abdullah et al, 2016), or the features of the management (Abatecola et al, 2013) such as their motivations and beliefs, their possessed skills (Lussier, 1995), their previous work experience (Larson and Clute, 1979) and their relationship with the ownership (Blanco et al, 2012;Ciampi and Gordini, 2012;Saleh et al, 2017) or aspects relating to the corporate governance (Chaganti et al, 1985;Ciampi and Gordini, 2013b;Ciampi, 2015;Daily and Dalton, 1994). Other contributions have focused on innovation (Koh, 1996) and the role of intangibles (Formisano and Russo, 2012;Quintilliani, 2016) rather than the relationship between enterprises and banks (Modina, 2015;Bauer and Esqueda, 2017), and the territory (Gibilaro and Piatti, 2012;Ciampi and Gordini, 2013c) or the structural capital of SMEs (Modina and Pietrovito, 2014).…”