Assessing the Profitability and Riskiness of Small Business Lenders in the Banking Industry

41 Pages Posted: 27 Sep 2007

See all articles by James W. Kolari

James W. Kolari

Texas A&M University - Department of Finance

G. Hwan Shin

University of Texas at Tyler

Abstract

Two alternative research hypotheses concerning how small business lending affects bank profitability are tested. The specialization hypothesis argues for higher profitability than other banks due to increased focus on small business lending, whereas the diversification hypothesis asserts that small business lenders' profitability will be lower than other more diversified banks. Using the rate of return on assets as the profit measure, we find that small business exposure tends to have neutral or positive effects on bank profitability after taking into account bank risk. Using efficient frontier analyses that focus on the rate of return on equity, we find that small business lenders reap benefits from specialization, particularly in terms of reducing failure risk. We conclude that the evidence supports the specialization hypothesis.

Keywords: Small business lending, Banking, Profitability, Diversification

JEL Classification: G11, G21, G39, M13

Suggested Citation

Kolari, James W. and Shin, G. Hwan, Assessing the Profitability and Riskiness of Small Business Lenders in the Banking Industry. Available at SSRN: https://ssrn.com/abstract=1017093 or http://dx.doi.org/10.2139/ssrn.1017093

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

G. Hwan Shin

University of Texas at Tyler ( email )

3900 University Boulevard
Tyler, TX 75701
United States
(903) 565-5806 (Phone)

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