Effects of banks on “debt‐sensitive” small businesses

Abstract

Purpose

The purpose of this paper is to identify which small businesses are most “debt sensitive”, or most likely to be affected by banking market conditions.

Design/methodology/approach

For the primary debt sensitivity categories, the paper hypothesizes that bank conditions are most likely to have significant effects on firms in size classes and industries that are “on the bubble” for credit availability (probability of credit close to 0.50), rather than those with “relatively easy” or “relatively difficult” access to credit (probability much higher or lower, respectively). The secondary classifications also require that loans fund a substantial proportion of assets for the firms in the category that have loans. These hypotheses are tested using a comprehensive data set of US small businesses by size class and industry matched with variables measuring bank market power, market structure, and efficiency in the firm's local markets.

Findings

Findings show that the data are consistent with the hypotheses, with the strongest support for the hypotheses occurring using the secondary classifications. In terms of policy implications, the findings suggest that the credit availability of small, debt‐sensitive firms may be reduced by within‐market mergers that increase concentration in rural markets, but that the more common type of recent consolidation – creating larger banks that operate in more markets – may be associated with an increase in credit availability for these sensitive firms. Such an increase in credit availability would be magnified if consolidation resulted in increased bank operating efficiency.

Originality/value

The paper offers insights into the effect of banks on “debt‐sensitive” small businesses.

Citation

Berger, A.N. and Ostromogolsky, P. (2009), "Effects of banks on “debt‐sensitive” small businesses", Journal of Financial Economic Policy, Vol. 1 No. 1, pp. 44-79. https://doi.org/10.1108/17576380910962385