The Information Revolution and Small Business Lending: The Missing Evidence

Federal Reserve Bank of Atlanta Working Paper Series No. 2010-7

21 Pages Posted: 28 Mar 2010

See all articles by Robert DeYoung

Robert DeYoung

University of Kansas School of Business

W. Scott Frame

Federal Reserve Bank of Dallas

Dennis Glennon

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Peter J. Nigro

Bryant University - Department of Finance

Date Written: March 1, 2010

Abstract

This paper provides empirical confirmation for Petersen and Rajan's (2002) widely accepted conjecture that information technology was the primary driver of the observed increase in small business borrower-lender distances in the United States in recent years. Using a different data source for small business loans, we show that annual increases in borrower-lender distances were slow and steady prior to 1993 (the end point in Petersen and Rajan's data) but accelerated rapidly after that. Importantly, we are able to assign at least half of this acceleration to the adoption of credit scoring technologies by the lending banks. Our tests also reveal strong statistical associations between lending distances and borrower characteristics, lender characteristics, market conditions, regulatory constraints, moral hazard incentives, and principal-agent incentives.

Keywords: borrower-lender distance, credit scoring, information technology, small business lending

JEL Classification: G21, O33

Suggested Citation

DeYoung, Robert and Frame, W. Scott and Glennon, Dennis and Nigro, Peter J., The Information Revolution and Small Business Lending: The Missing Evidence (March 1, 2010). Federal Reserve Bank of Atlanta Working Paper Series No. 2010-7. Available at SSRN: https://ssrn.com/abstract=1577911 or http://dx.doi.org/10.2139/ssrn.1577911

Robert DeYoung

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

W. Scott Frame (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 N Pearl Street
Dallas, TX 75201
United States
214-922-6984 (Phone)

Dennis Glennon

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

250 E Street, SW
Senior Financial Economist; Economics Department
Washington, DC 20219-0001
United States
202-874-4725 (Phone)
202-874-5394 (Fax)

Peter J. Nigro

Bryant University - Department of Finance ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States

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