The Diffusion of Financial Innovations: An Examination of the Adoption of Small Business Credit Scoring by Large Banking Organizations

FRB Atlanta Working Paper No. 2001-9

27 Pages Posted: 30 May 2001

See all articles by Jalal D. Akhavein

Jalal D. Akhavein

Fitch Ratings Inc.

W. Scott Frame

Federal Reserve Bank of Dallas

Lawrence J. White

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2001

Abstract

Financial innovation has been described as the "life blood of efficient and responsive capital markets." Yet, there have been few quantitative investigations of financial innovation and the diffusion of these new technologies. Of the latter, there have been only three prior quantitative studies, and all three used the same data set on automated teller machines!

This paper makes a significant contribution to the financial innovation literature by examining the diffusion of a recent important innovation of the 1990s: banks' use of credit scoring for small business lending. The authors examine the responses of 95 large banking organizations to a survey that asked whether they had adopted credit scoring for small business lending as of June 1997 (56 had done so) and, if they had adopted it, when they had done so. The authors estimate hazard and tobit models to explain the diffusion pattern of small business credit scoring models. Explanatory variables include several market, firm, and managerial factors of the banking organizations under study.

The hazard model indicates that larger banking organizations introduced innovation earlier, as did those located in the New York Federal Reserve district; both results are consistent with expectations. The tobit model confirms these results and also finds that organizations with fewer separately chartered banks but more branches introduced innovation earlier, which is consistent with theories stressing the importance of bank organizational form on lending style. Though the managerial variables signs are consistent with our expectations, none yields significant results.

Keywords: Credit scoring, small business lending, financial innovation, technology diffusion

JEL Classification: G2, O3, L2

Suggested Citation

Akhavein, Jalal D. and Frame, W. Scott and White, Lawrence J., The Diffusion of Financial Innovations: An Examination of the Adoption of Small Business Credit Scoring by Large Banking Organizations (April 2001). FRB Atlanta Working Paper No. 2001-9. Available at SSRN: https://ssrn.com/abstract=267681 or http://dx.doi.org/10.2139/ssrn.267681

Jalal D. Akhavein

Fitch Ratings Inc. ( email )

One State Street Plaza
New York, NY 10004
United States

W. Scott Frame

Federal Reserve Bank of Dallas ( email )

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

Lawrence J. White (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
748
Abstract Views
3,287
rank
23,118
PlumX Metrics