How Do Banks Assess Entrepreneurial Competence? The Role of Voluntary Information Disclosure
International Small Business Journal, 32(5), 525-544, 2014
53 Pages Posted: 7 Jun 2015
Date Written: 2012
Abstract
This research adds to the literature on relationship lending in the small business context by discussing the roles of entrepreneurial competence and voluntarily disclosed information as determinants of credit access. More specifically, we propose that the loan manager’s evaluation of the information voluntarily disclosed by the entrepreneur is an important complement to publicly available financial data and soft information collected through observation and third parties in framing the loan manager’s perception of the entrepreneur’s competence. Further, we argue that banks charge lower interest rates if the loan manager perceives the entrepreneur to be competent. Econometric analysis based on 433 bank-firm relationships supports these hypothesised relationships. The results imply that entrepreneurs need to communicate their competence effectively to loan managers, and that banks should utilise their loan managers’ personal evaluations as inputs to lending decisions.
Keywords: small and medium enterprises, competence, interest rate, banks, finance, trust
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