Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks

51 Pages Posted: 26 Dec 2001  

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Nathan H. Miller

U.S. Department of Justice

Mitchell A. Petersen

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2002

Abstract

Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally "difficult" credits, such as firms that do not keep formal financial records. Moreover, controlling for the endogeneity of bank-firm matching, large banks lend at a greater distance, interact more impersonally with their borrowers, have shorter and less exclusive relationships, and do not alleviate credit constraints as effectively. All of this is consistent with small banks being better able to collect and act on soft information than large banks.

Keywords: Functional form, organizational structure, distance, banking, soft information, hard information

JEL Classification: G3, G2, D2

Suggested Citation

Berger, Allen N. and Miller, Nathan H. and Petersen, Mitchell A. and Rajan, Raghuram G. and Stein, Jeremy C., Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks (September 2002). Harvard Institute Research Working Paper No. 1976; Kellogg School of Management Working Paper No. 288. Available at SSRN: https://ssrn.com/abstract=294660 or http://dx.doi.org/10.2139/ssrn.294660

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

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Wharton Financial Institutions Center

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European Banking Center

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Nathan H. Miller

U.S. Department of Justice ( email )

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Mitchell A. Petersen

Northwestern University - Kellogg School of Management ( email )

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Raghuram G. Rajan

University of Chicago - Booth School of Business ( email )

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Jeremy C. Stein (Contact Author)

Harvard University - Department of Economics ( email )

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