How do banks assess entrepreneurial competence? The role of voluntary information disclosure

Abstract

This article explores relationship lending in the small business context: it discusses the roles of entrepreneurial competence and voluntarily disclosed information as determinants of credit access. More specifically, it proposes that the loan manager’s evaluation of the information voluntarily disclosed by the entrepreneur is an important complement to publicly available financial data and soft information collected through observation and third parties in framing the loan manager’s perception of entrepreneur competence. Further, the article argues that banks charge lower interest rates if the loan manager perceives the entrepreneur to be competent. Econometric analysis based on 433 bank–firm relationships supports these hypothesised relationships. The results imply that entrepreneurs need to communicate their competence effectively to loan managers, and that banks should utilise these personal evaluations as inputs to lending decisions.

Can Management Accounting Be Helpful for Young and Small Companies? Systematic Review of a Paradox

“…MA = FA most frequently leads to improved financial characteristics (nine hypotheses), such as better access to credit or reduced cost of credit (Allee and Yohn ; Moro et al . ; Vander Bauwhede et al . ).…”

“…Freestyle management control activities seem to foster growth (two hypotheses) and performance (two hypotheses). MA = FA most frequently leads to improved financial characteristics (nine hypotheses), such as better access to credit or reduced cost of credit (Allee and Yohn 2009;Moro et al 2014;Vander Bauwhede et al 2015). Management of liquidity has been found to lead to growth (two hypotheses).…”

“…The effectiveness becomes clear when looking at two types of MA that are explicitly based on accounting: the adoption of accounting-based management control activities or financial accounting practices has two main benefits. First, these MA practices serve mainly the reporting needs of outside partners such as investors or governmental institutions, because they help to reduce information asymmetry (Allee and Yohn 2009;Cassar 2009;Moro et al 2014;Wijbenga et al 2007). Second, these practices support young and small companies as they encounter increasing organizational complexity.…”

Bank market concentration, relationship banking, and small business liquidity

“…For small firms operating where there are highly concentrated bank markets, our findings suggest the need to develop stronger links with their bank. Moro et al (2014) identify those Italian small firms that actively and voluntarily disclose information benefit from lower interest rates. Our results support these findings and indicate that there are benefits from small firms developing closer links with their bank.…”

Trust, control and knowledge transfer in small business networks

“…Interestingly, empirical research supports this consideration and emphasizes that its presence reduces agency problems (Ring and Van de Ven 1992), the costs of monitoring and control (Zand 1972), and the use of legalistic remedies (Sitkin and Roth 1993), and aids decision making in situations where information is scarce (Luhmann 2000). Trust is even found to have a positive effect in lending relationships (Moro et al 2014;Moro and Fink 2013) and generally contribute to build the ground for cooperation in multistakeholder networks (Roloff 2008); it is helpful in risky situations where the potential damage is greater than the advantage to be gained, and where the observation of past behaviour and information that is collected independently from the relationship play an important role (Fink and Kessler 2010). All in all, trust is a key aspect that is used by human beings to deal with risk.…”