Jonathan A. Scott

Women-Owned businesses and access to bank credit: Evidence from three surveys since 1987

Abstract Women-owned businesses are often thought to face difficulties in applying for and securing bank loans (Schwartz, 1979; Riding and Swift, 1990; Buttner and Rosen, 1992; Fabowale et al., 1995; Haines et al., 1999; Coleman, 2000). While there may always be individual instances of difficulties with credit availability that might receive the attention of the media, the more important issue—especially given the increasing contribution of women-owned business to growth in the US economy, is whether women-owned businesses face any systemic, non-economic discrimination in applying for credit. We test three questions related to the success of women-owned businesses in accessing commercial bank financing. First, are women-owned businesses less likely to apply for bank loans than businesses owned by men? Second are women-owned businesses more likely to be turned down in their most recent loan application? And finally, if approved on their most recent loan application, are they more likely to receive a smaller loan? We found gender to be related to the application for bank loans as well as the size of the loans but not to the frequency of turndowns. These findings may be due to an omitted variable that could capture womens concerns about maintaining control over their business.

The effect of the Bankruptcy Reform Act of 1978 on small business loan pricing

Abstract The Bankruptcy Reform Act of 1978 contains several provisions that can affect the cost of producing loans for financial intermediaries. In a competitive lending market the additional monitoring and expected foreclosure costs imposed by the change in the bankruptcy law should be passed on to the borrower. Using survey data from a sample of small business loans from commercial banks, evidence is presented that the enactment of the new law resulted in higher contract rates of interest.

Loan Officer Turnover and Credit Availability for Small Firms

This paper presents empirical evidence on the role loan officers play in facilitating small firm access to commercial bank loans. If loan officers use soft information (for example, assessments of character, information from customers and suppliers) to make lending decisions that would not otherwise be made on the basis of hard information (for example, tax returns or financial statements), then, frequent turnover in loan officers should be associated with an adverse effect on credit availability. This relationship is confirmed empirically using survey data of U.S. small firms in 1995 and 2001, where loan officer turnover is positively related to the turndown rate on the most recent loan application. Although loan officer turnover could be influenced by the turndown rate (for example, an owner changes banks and gets a new loan officer as a result of a recent turndown), its negative effect on credit availability persists under several different tests.

A Note on Agency Conflicts and the Small Firm Investment Decision

This paper explains how agency conflicts—and potential agency conflicts—can influence the investment decisions of small firms, and provides evidence of these effects using data from a recent survey of small firm investment practices. The survey asks business owners to identify their most important investment concern—overinvestment or underinvestment. We find that underinvestment concerns are more prevalent in growing firms, and those with concentrated ownership and control structures. Overinvestment concerns increase as firms adopt less‐concentrated ownership and control structures. These results suggest that the management challenges facing small firms shift as the degree of separation between ownership and control becomes greater.

The AT&T divestiture: Effect of rating changes on bond returns

Abstract As part of its divestiture agreement, AT&T was required to spin off its local exchange companies (LECs). Confronted with the task of devising ratings for the newly independent companies, Moodys and S&P published new ratings that conflicted for all 21 LECs. This study reveals that the S&P rating decision can largely be explained using a small set of historical financial variables, but these variables are not successful in explaining Moodys ratings. In addition, an examination of LEC bond returns shows that the rating-change announcements did not produce significant abnormal returns on or around the announcement dates. Apparently, most of this information had already been assimilated in bond-market prices.

The effect of stock-for-debt swaps on bank holding companies

Abstract Twenty-two of the numerous stock-for-debt swaps that have taken place since August 1981 have been by bank holding companies. Although the most oft-quoted reason for making the swap is its positive effect on reported earnings, we argue that the effects of the Bankruptcy Tax Act of 1980 on the tax treatment of early retirement of discount debt often makes stock-for-debt swaps a preferable alternative to cash repurchases of discount debt for sinking fund obligations. Furthermore, for bank holding companies, the swaps allow them to adjust their capital positions to new optimal levels ad dictated by the more stringent capital standards promulgated by the regulatory authorities in 1981. For 99 non-banking firms we found a significant and negative abnormal average return on the swap announcement date of −0.49 percent. For the 22 bank holding companies, however, we found no significant abnormal average return on the announcement date of the swaps. The results suggest that swaps may be reducing the potential costs of regulatory interference for bank holding companies if they are overlevered, which offsets whatever other force is driving down stock prices on new issue announcement dates.

The Changing Landscape of Small-Firm Finance

This chapter reflects on the changes in financing small firms during the past 25 years by reviewing the extant literature on how small businesses are financed at their inception, how continuing operations are financed, and how changing technologies have shaped capital markets for small firms. Our review of a unique small firm time series data set shows that many of the obstacles small firms faced in the early 1980s have mostly disappeared. New firm formations continue to depend on owner savings, friends, and family, while venture capital remains a microscopic proportion of total new firm financing in any given year. Once operating, small firms depend primarily on banks for operating support and capital investment, but the use of credit cards (business and personal) and nonbank sources (finance/leasing companies) is increasing in importance. We end with a discussion of two current issues in small firm finance: the cumulative impact of banking consolidation in the USA and the effect of the current financial crisis in the USA on small firm access to capital.

The “Output Gap” and Excess Labor Employment

The debate surrounding the current status of monetary policy and inflation has appealed to the existence of an output gap that will prevent the resurgence of substantial inflation. This paper presents evidence that the expansion in the late 1990s was unusual and should not be used as a basis for benchmarking the output gap at zero. In particular, there was an unusual psychology that prevailed in the late 1990s and 2000 that led to excessive capital spending and hiring. If policymakers overestimate the magnitude of the output gap by overestimating excess labor supply, they run the risk of making timing errors in the implementation of economic policy.