John D. Wolken

Small Business Loan Turndowns, Personal Wealth and Discrimination

We examine the impact of personal wealth on small business loan turndowns across demographic groups. Information on home ownership, home equity, and personal net worth, in combination with a rich set of explanatory variables, furthers our understanding of the credit market experiences of small businesses across demographic groups. We find substantial unexplained differences in denial rates between African-American-, Hispanic-, Asian-, and white-owned firms. We find that greater personal wealth is associated with a lower probability of loan denial. However, even after controlling for personal wealth, large differences in denial rates across demographic groups remain.

How important are small banks to small business lending?: New evidence from a survey of small firms

Abstract Typically, small banks lend a larger proportion of their assets to small businesses than do large banks. The recent wave of bank mergers has thinned the ranks of small banks, raising the concern that small firms may find it difficult to access bank credit. However, bank consolidation will reduce small business credit only if small banks enjoy an advantage in lending to small businesses. We test the existence of a small bank cost advantage in small business lending by conducting the following simple test: If such advantages exist, then we should observe small businesses in areas with few small banks to have less bank credit. Using data on small business borrowers from the 1993 National Survey of Small Business Finance, we find that the probability of a small firm having a line of credit from a bank does not decrease in the long run when there are fewer small banks in the area, although short-run disruptions may occur. Nor do we find that firms in areas with few small banks are any more likely to repay trade credit late, suggesting that such firms are no more credit constrained than firms in areas with many small banks.

Competition, small business financing, and discrimination: evidence from a new survey

Using data from the 1993 National Survey of Small Business Finances, we examine some of the factors influencing differences in small business credit market experiences across demographic groups. We analyze credit applications, loan denials, and interest rates paid across gender, race and ethnicity of small business owners. In addition, we analyze data gathered from small business owners who said they did not apply for credit because they believed that their application would have been turned down. This set of analyses, in combination with important new information on the personal credit history of the principal owner, the business credit history of the firm, a rich set of additional explanatory variables, and information on local bank market structure, helps us to understand better the sources of observed differentials in the credit market experiences of small business operators across demographic groups. Credit market experiences often differ markedly among demographic groups. However, so do the characteristics of firms and owners. Results of our multivariate analyses show that many of the factors we consider help to explain the observed differences in credit market experiences However, even after controlling for a large number of firm and owner characteristics, substantial differences often remained. There was also evidence that some of the differentials were associated with the degree of lender market concentration in the firms local area.

Firm, Owner, and Financing Characteristics: Differences between Female- and Male-Owned Small Businesses

Differences in financing patterns and financial characteristics between female- and male-owned firms are often attributed to imperfections in credit markets. However, these differences could arise for many reasons, such as differences in the characteristics and preferences of owners and firms. The differences in lending patterns by gender may in fact have little or nothing to do with supply side factors or market imperfections. The goal of our paper is to test the hypothesis that differences in financing patterns between female- and male-owned small businesses can be explained by differences in business, credit history, and owner characteristics other than gender. In what follows, we first describe how owner, business, and financing characteristics of female-owned businesses differ from male-owned businesses. We then conduct a multivariate analysis of indicators of credit use and recent lending experiences, modeling each of these as a function of firm, owner, and credit history characteristics.

Does Distance Matter in Banking

Deregulation and technological change have reduced the transactions costs that led to the dominance of local financial service suppliers, leading some to question if distance still matters in banking. This debate has been particularly acute in small business banking, where transactions costs are believed to be particularly high. This paper provides a detailed review of the literature on distance in banking markets, highlighting the reasons why geographic proximity is believed to be important and examining the changes that may have affected its importance. Relying on new data from the 2003 Survey of Small Business Finances, we examine how distances between small firms and their financial service suppliers changed over the 1993-2003 decade. Our analysis reveals that distances increased, though the extent varied substantially across financial services and supplier types. Generally, increases were observed in the early half of the decade, while distances declined in the following five years. There was also a trend towards less in person interaction between small firms and their suppliers of financial services. Nevertheless, most relationships remained local, with a median distance of 5 miles in 2003. The results suggest that distance, while perhaps not as tyrannical as in the past, remains an important factor in banking.

Examining the Impact of Credit Access on Small Firm Survivability

This paper examines the effects of credit availability on small firm survivability over the period 2004 to 2008 for non-publicly traded small enterprises. Using data from the 2003 Survey of Small Business Finances, we develop failure prediction models for a sample of small firms that were confirmed to have been in business as of December 2003, with particular attention to the impact of credit constraints. We find that credit constrained firms were significantly more likely to go out of business than non constrained firms. Moreover, credit constraint and credit access variables appear to be among the most important factors predicting which small U.S. firms went out of business during the 2004-2008 period even though an extensive set of firm, owner, and market characteristics were also included as explanatory factors.

New data sources for research on small business finance

Abstract This paper describes three new sources of data on small business finances: Bank Call Report data on small business lending, the 1995 Survey of Consumer Finances (SCF), and the 1993 National Survey of Small Business Finances (NSSBF). Each of these data sources offers publicly available micro-level data useful for examining a wide variety of issues and questions about small business finances. A number of studies which have utilized these data are cited and information on how to access these data is provided.

Geographic diversification in banking, market share changes, and the viability of small independent banks

The prospect of unlimited nationwide banking raises a question about the viability of small independent banks in competition with large, geographically diversified banking organizations. This study addresses the issue of small bank viability by focusing on the relative performance of independent banks and bank holding company subsidiaries in a regime of intrastate banking, where “performance” is measured by the cumulative change in a banks local market share over time. Two regression equations of the same general form are estimated using the same sample of independent and affiliated banks, albeit for different time periods to distinguish between the short-term and long-term effects of affiliation. Regression results indicate that affiliation with a geographically diversified bank holding company generally provides no significant long-term competitive advantage (in terms of market share accumulation) for holding company subsidiaries over independent banks. The only exception is a modest benefit afforded to banks with relatively small pre-acquisition market shares that are acquired by larger bank holding companies as initial entry vehicles into new markets.

Distance Still Matters: The Information Revolution in Small Business Lending and the Persistent Role of Location, 1993-2003

In a seminal article on small business lending, Petersen & Rajan (2002) argue that technological changes have revolutionized small business lending markets, weakening the reliance of small businesses on local lenders and increasing geographic distances between firms and their credit suppliers. While their data only cover through 1993, they conjecture that the pace of change accelerated after 1993. Using the 1993, 1998, and 2003 Surveys of Small Business Finances (SSBFs), we test whether the distance changes identified by Petersen and Rajan continued or accelerated during the following decade. Using a novel application of Oaxaca-Blinder decomposition, we identify the extent to which specific observable characteristics are associated with distance changes and draw three conclusions. First, while distances increased between 1993 and 1998 at a faster rate than found by Petersen & Rajan, distance increases appear to have halted or possibly reversed between 1998 and 2003. Second, rather than increasing proportionally for all small firms, distance increases were uneven across firms over the decade, with higher credit quality firms and firms with more experienced ownership realizing greater gains in distance than other firms. Finally, distances increased faster at older firms and, regardless of firm age, increases in distance have only affected some product types, primarily those involving asset-back loans (including mortgages). For relationships that involved the provision of either lines of credit or multiple types of credit, distances increased very little or not at all during the decade. This analysis provides a detailed and nuanced view of how the market for small business credit has evolved during a period of rapid technological change.

An empirical investigation of the critical herfindahl index in banking

Abstract Using 1985 data on unit banking states, we find evidence of a critical Herfindahl index in the market for commercial and industrial loans. For markets with concentration below the critical level, price-cost margins increase with concentration; for markets with concentration above the critical level, increases in concentration have insignificant effects on performance. This paper improves on earlier work on critical concentration in banking by using a superior switching regressions technique and data collected after the significant deregulation of depository institutions of the early 1980s.