Borrower–lender distance, credit scoring, and loan performance: Evidence from informational-opaque small business borrowers
By Robert DeYoung, D. Glennon, P.eter J Nigro. Journal of Financial Intermediation, 2008
330 citations recorded by the source corpus.
Abstract Over the past decade, the distances between small businesses and their bank lenders have increased substantially, as increasing numbers of bank lenders have implemented credit-scoring models to evaluate the creditworthiness of small businesses. These developments are antithetical to the traditional small business lending process, which emphasizes local proximity, bank–borrower relationships, and qualitative information. We theoretically model and empirically test whether and how these changes have affected the probability that small business loans default, using 1984–2001 data from the SBA's flagship lending program. On average, both distance and credit scoring are associated with higher default probabilities—the former suggests that distance interferes with information collection, while the latter suggests that production efficiencies encourage credit-scoring lenders to expand output by making riskier loans at the margin. The default-increasing effects of distance are substantially dampened at credit scoring banks, however, suggesting that hard-information lending approaches may outperform soft-information, relationship-based lending approaches in long-distance situations.
Subfields: Accounting, Finance
View Paper: https://www.semanticscholar.org/paper/2d6a25dec1ba5eb5d326889bfb6cbbdbda86cb8a
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Citations in the corpus
- Innovation, SMEs and the liability of distance: the demand and supply of bank funding in UK peripheral regions (2016, background): “Research in the US also shows that both distance and credit scoring are associated with higher default probabilities (DeYoung et al, 2008).”
- Bargaining power and information in SME lending (2010, background): “Fifth, in further analyses we investigated whether physical distance (e.g., DeYoung et al. 2008 ) or the mode of communication, in particular ‘‘personal’’ versus ‘‘impersonal’’ (e.g., Petersen and Rajan 2002; Berger et al. 2005), affects the statistical significance or economic magnitude of our fin”