Bargaining Power and Information in SME Lending
37 Pages Posted: 14 Feb 2009 Last revised: 5 Aug 2010
Date Written: August 2, 2010
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
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