Bargaining Power and Information in SME Lending

37 Pages Posted: 14 Feb 2009 Last revised: 5 Aug 2010

See all articles by Jens Grunert

Jens Grunert

University of Tuebingen - Department of Banking

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE); Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Date Written: August 2, 2010

Abstract

Small- and medium-sized enterprises (SMEs) are informationally opaque and bank-dependent. In SME lending, banks largely rely on soft information because the scale and scope of hard information is limited. We analyze whether and how hard and soft information affects the borrower’s bargaining power vis-à-vis its bank. We use the fact that, for a given credit rating, certain borrowers obtain better loan terms than others to define measures of relative bargaining power. Using SME loan data from the United States and Germany, we find that more favorable soft information (management skills and character) increases borrower bargaining power. We also show that more favorable soft than hard information improves borrower bargaining power. The results are not driven by manipulation or statistical limitations of the credit ratings. Our study suggests that soft information represents an important and direct determinant of borrower bargaining power, affecting the outcomes of the loan contracting process.

Keywords: SME lending, Bargaining power, Hard and soft information, Credit ratings, Loan terms

JEL Classification: G21, L11, M13

Suggested Citation

Grunert, Jens and Norden, Lars, Bargaining Power and Information in SME Lending (August 2, 2010). Available at SSRN: https://ssrn.com/abstract=1342990 or http://dx.doi.org/10.2139/ssrn.1342990

Jens Grunert

University of Tuebingen - Department of Banking ( email )

Mohlstrasse 36
D - 72074 Tuebingen
Germany

Lars Norden (Contact Author)

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

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