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File name: SSRN-id788384. ; Size: 553K
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Relationship Banking and SMEs: A Theoretical Analysis
Timo Baas
German Institute for Economic Research (DIW Berlin); University of Potsdam
Mechthild Schrooten
German Institute for Economic Research (DIW Berlin)
January 2005
DIW Discussion Papers No. 469
Abstract:
Reliable information on small and medium sized enterprises (SMEs) is rare and costly for financial intermediaries. To compensate for this, relationship banking is often considered as the appropriate lending technique in the case of SMEs. In this paper we offer a theoretical model to analyze the pricing behavior of banks in a Bertrand competition framework with monitoring costs. We show that the lack of reliable information leads to comparably high interest rates even if a long-term relationship between borrower and bank exists. The paper offers a theoretical explanation why SME managers consider external finance as a major constraint to their business.
Number of Pages in PDF File: 27
Keywords: Relationship Banking, Financial Constraints, Small and Medium Sized Firms, SME, Accounting
JEL Classification: D43, D 82, G21, M41
working papers series
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Date posted: September 11, 2005
Suggested CitationBaas, Timo and Schrooten, Mechthild, Relationship Banking and SMEs: A Theoretical Analysis (January 2005). DIW Discussion Papers No. 469 . Available at SSRN: http://ssrn.com/abstract=788344 or http://dx.doi.org/10.2139/ssrn.788344
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