Abstract
Non-bank loans to corporate businesses have shown a dramatic increase compared to bank loans. Despite the increasing importance of non-bank lending, the differences between loans made by different types of lenders are mostly unknown. To uncover the distinctions, the author investigates whether bank and non-bank financial institutions deal differently with information scarcity of small firms by introducing lender-borrower distance as a proxy for information availability. Using the National Survey of Small Business Finances (NSSBF) provided by the Federal Reserve Board, estimate the loan approval probability models after controlling for various borrower characteristics. The NSSBF data is collected by using stratified sampling to ensure sufficient numbers of observations for minority-owned firms. To circumvent potential bias due to the sampling method, the author follows the approach suggested by Wooldridge (1999) and estimates a weighted maximum likelihood estimation to adjust for sampling design. This paper establishes novel evidence supporting the notion that banks and non-bank financial institutions are different in their ability to deal with information scarcity. Bank loan approval probability decreases as distance to their borrowers increases, while its effect on non-bank loan approval probability is statistically insignificant, supporting the notion that non-bank lending is different from bank lending in dealing with information asymmetry.
Highlights
Non-bank loans to corporate businesses have shown a dramatic increase compared to bank loans since the 1980’s (Acharya, et al 2013; Adrian & Ashcraft, 2012; Bengtsson, 2013; Careyat al. 1998; Cheng & Degryse, 2010; Lu et al 2015)
This paper establishes novel evidence supporting the notion that banks and non-bank financial institutions are different in their ability to deal with information scarcity
Bank loan approval probability decreases as distance to their borrowers increases, while its effect on non-bank loan approval probability is statistically insignificant, supporting the notion that non-bank lending is different from bank lending in dealing with information asymmetry
Summary
Non-bank loans to corporate businesses have shown a dramatic increase compared to bank loans since the 1980’s (Acharya, et al 2013; Adrian & Ashcraft, 2012; Bengtsson, 2013; Careyat al. 1998; Cheng & Degryse, 2010; Lu et al 2015). This paper investigates the following questions to understand the differences between private debt contracts, loans by banks and non-bank financial institutions: Do banks and non-banks deal differently with information scarcity of their borrowers? Recent research by Gaspar and Massa (2007) has documented evidence consistent with the claim that increase in geographical distance can cause acute information asymmetry in the U.S financial market Following their approaches, the author uses lender-borrower distance as a proxy variable for information scarcity and investigates its asymmetric impacts on bank and non-bank loan pricing and availability.
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