Bank switching of US small businesses: new methods and evidence

Song Zhang*, Liang Han, Konstantinos Kallias, Antonios Kallias

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

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    Abstract

    Despite being informationally opaque, small firms often switch from their primary financial institution to transactional lenders, with the relationship banking theory invoking the holdup problem as a culprit explanation. Using US evidence and an estimation strategy that overcomes traditional shortcomings in small business research, our study captures the determinants and, for the first time, the ex post effects of the switching decision. We find that switching is less likely when the primary financial institution is a nearby bank associated with quality services and connected to the firm via other business or social relationships. Small firms become more loyal as they grow in size and pursue nonmortgage credit. Outside the primary relationship, both loan approval and borrowing cost are adversely impacted, however loan maturities are longer. Moreover, the likelihood of pledging collateral remains unaffected, provided that the type of collateral is least sensitive to the borrower’s information environment. Jointly, our findings describe a trade-off inconsistent with the holdup problem, and an opportunity for banks to enhance customer loyalty by improving aspects of the relationship unrelated to the terms of credit.
    Original languageEnglish
    Number of pages44
    JournalReview of Quantitative Finance and Accounting
    Early online date4 Jan 2022
    DOIs
    Publication statusEarly online - 4 Jan 2022

    Keywords

    • small business
    • relationship banking
    • IPTW propensity score
    • entropy balancing

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