Abstract
AbstractAccording to the current paradigm of relationship lending in small business lending, loan officers produce soft information about their small- and medium-sized enterprises borrowers. We examine this common assumption by directly measuring soft information and testing how can loan officer accumulate this type of information. We used a data-set on Tunisian small businesses via a specially designed questionnaire addressed to loan officers and a data based on lines of credit files. We find that on balance loan officers play an important role in producing soft information. In fact, the specificity of loan officer, direct contact with the manager, and regular visit to the firm contribute to more information production, while frequent loan officer turnover hinders this mission. To further pursue the validity of our empirical methodology, we test whether the production of soft information by loan officers benefits borrowers. Our results confirm that besides soft information, audited financial statements i...
Highlights
Practitioners and business analysts have long recognized the importance of bank relationships for firms and a slate of recent theoretical models have rekindled academic interest in the topic
We find that on balance loan officers play an important role in producing soft information
The current paradigm of relationship lending in small business lending implicitly suggests that commercial loan officers may play a critical role in relationship lending by producing soft information about their smalland medium-sized enterprises (SMEs) borrowers
Summary
Practitioners and business analysts have long recognized the importance of bank relationships for firms and a slate of recent theoretical models have rekindled academic interest in the topic. The current research paradigm in small business lending emphasizes the advantages of relationship lending for opaque firms, Berger and Udell (1995), Boot (2000), Cole (1998), Petersen and Rajan (1994) etc In this paradigm, loan officers are hypothesized to play a crucial role in producing “soft” information through direct and regular contact with the manager. We directly test whether loan officer relationship-building leads to more production of soft information through a data survey based on loan credit files and loan officer’s activities and knowledge about firms through a questionnaire sent to several banks in Tunisia. According to the empirical literature on relationship lending, more knowledge mitigates problems stemming from asymmetric information and is linked to greater relationship benefits This hypothesis is based on the implicit assumption suggesting that loan officer produce soft information. It indicates if the firm gets credit with lower rates than regulatory
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