The Importance of Financial Market Development on the Relationship Between Loan Guarantees for SMEs and Local Market Employment Rates

38 Pages Posted: 12 Dec 2010

See all articles by Craig E. Armstrong

Craig E. Armstrong

University of Alabama

Ben R. Craig

Federal Reserve Bank of Cleveland; Deutsche Bundesbank

William E. Jackson

Culverhouse College of Business, University of Alabama

James B. Thomson

University of Akron

Date Written: November 10, 2010

Abstract

We empirically examine whether a major government intervention in the small-firm credit market yields significantly better results in markets that are less financially developed. The government intervention that we investigate is SBA-guaranteed lending. The literature on financing small and medium size enterprises (SMEs) suggests that small firms may be exposed to a particular type of market failure associated with credit rationing. And SMEs in markets that are less financially developed will likely face a greater degree of this market failure. To test our hypothesis, we use the level of bank deposits per capita as our relative measure of financial market development, and we use local market employment rates as our measure of economic performance. After controlling for the appropriate cross-sectional market characteristics, we find that SBA-guaranteed lending has a significantly more (less) positive impact on the average annual level of employment when the local market is relatively less (more) financially developed. This result has important implications for public policy directives concerning where SBA-guaranteed lending should be directed.

Keywords: Less financially developed markets, market liquidity, employment rates, small business credit markets, loan guarantees, credit rationing

JEL Classification: G38, H81, O16

Suggested Citation

Armstrong, Craig E. and Craig, Ben R. and Jackson, William E. and Thomson, James B., The Importance of Financial Market Development on the Relationship Between Loan Guarantees for SMEs and Local Market Employment Rates (November 10, 2010). FRB of Cleveland Working Paper No. 10-20. Available at SSRN: https://ssrn.com/abstract=1723444 or http://dx.doi.org/10.2139/ssrn.1723444

Craig E. Armstrong

University of Alabama ( email )

Tuscaloosa, AL 35487
United States

Ben R. Craig

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101
United States
216-579-2061 (Phone)
216-579-3050 (Fax)

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

William E. Jackson

Culverhouse College of Business, University of Alabama ( email )

Tuscaloosa, AL 35487-0225
United States
205.348.6217 (Phone)
205.348.6695 (Fax)

James B. Thomson (Contact Author)

University of Akron ( email )

Akron, OH 44325-4803
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
74
Abstract Views
1,008
rank
317,310
PlumX Metrics