Financial Constraints of Private Firms and Bank Lending Behavior

Abstract:     
We investigate whether and how financial constraints of private firms depend on bank lending behavior. Bank lending behavior, especially its scale, scope and timing, is largely driven by bank business models which differ between privately owned and state-owned banks. Using a unique dataset on small- and medium-sized enterprises (SMEs) we find that an increase in relative borrowings from local state-owned banks significantly reduces SMEs’ financial constraints, while there is no such effect for privately owned banks. Improved credit availability and private information production are the main channels that explain our result. We also show that the lending behavior of local state-owned banks is sustainable because it is less pro-cyclical and neither leads to more risk taking nor underperformance.

Number of Pages in PDF File: 50

Keywords: Financial constraints, Small- and medium-sized enterprises (SMEs), Bank business models, Bank ownership, Pro-cyclicality

JEL Classification: D21, G21, G32, L21, L30

working papers series