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Cookie Cutter vs. Character: The Micro Structure of Small Business Lending by Large and Small Banks

Published online by Cambridge University Press:  06 April 2009

Rebel A. Cole ,
Lawrence G. Goldberg  and
Lawrence J. White
Rebel A. Cole
Affiliation:
rcole@depaul.edu, Department of Finance, DePaul University, 1 East Jackson Boulevard, Chicago, IL 60604;
Lawrence G. Goldberg
Affiliation:
lgoldberg@miami.edu, Department of Finance, University of Miami, P.O. Box 248094, Coral Gables FL 33124;
Lawrence J. White
Affiliation:
lwhite@stern.nyu.edu, Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012.
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Abstract

The informational opacity of small businesses makes them an interesting area for the study of banks' lending practices and procedures. We use data from a survey of small businesses to analyze the micro level differences in the loan approval processes of large and small banks. We provide evidence that large banks ($1 billion or more in assets) employ standard criteria obtained from financial statements in the loan decision process, whereas small banks rely to a greater extent on information about the character of the borrower. These cookie-cutter and character approaches are compatible with the incentives and environments facing large and small banks.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 2 , June 2004 , pp. 227 - 251
Copyright
Copyright © School of Business Administration, University of Washington 2004

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