Seizing Opportunities: Small Businesses, Social Capital, and Banks

67 Pages Posted: 14 Apr 2022 Last revised: 22 Feb 2023

See all articles by Vojislav Maksimovic

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Jing Xue

University of Maryland, Robert H. Smith School of Business

Liu Yang

University of Maryland, Robert H. Smith School of Business

Date Written: February 20, 2023

Abstract

Why do small businesses exploit business opportunities better in some areas than others? In a sample of 1.2 million consumer-facing establishments, stores differ significantly across neighborhoods in the uptake of risk-free positive-NPV forgivable loans to which they are entitled. Local social capital strongly predicts loan uptake after controlling for close-by bank branches, income, and education. Increasing our social capital measures by one standard deviation increases the loan uptake by 6.4 percent of the sample mean, accounting for 20 percent of the variation at the zip code level. The effect is higher than having a bank branch within 1000 yards. Large, low-growth stores in less-dynamic areas benefit more from strong social capital, while small, high-growth stores in more-dynamic areas benefit more from bank branches. Virtual connections act similarly to in-person social connections and significantly affect loan uptake in advantaged locations. Virtual connections within the county predict higher use of local banks over FinTech lenders, while out-of-county virtual connections predict increased use of FinTech lenders. Overall, we find that small businesses exploit opportunities better in areas with at least moderate civic capital.

Keywords: Small Business, Social Capital, Virtual Connections, Local Banks, PPP, Business Dynamism, Reciprocity

JEL Classification: G32, G21, Z1

Suggested Citation

Maksimovic, Vojislav and Xue, Jing and Yang, Liu A., Seizing Opportunities: Small Businesses, Social Capital, and Banks (February 20, 2023). Available at SSRN: https://ssrn.com/abstract=4078042 or http://dx.doi.org/10.2139/ssrn.4078042

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business ( email )

Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)

HOME PAGE: http://scholar.rhsmith.umd.edu/vmax/home

Jing Xue

University of Maryland, Robert H. Smith School of Business ( email )

Van Munching Hall
Smith School of Business, Un
College Park, MD 20742
United States
20740 (Fax)

HOME PAGE: http://www.sophiajingxue.com/

Liu A. Yang (Contact Author)

University of Maryland, Robert H. Smith School of Business ( email )

4420 Van Munching Hall
Robert.H.Smith School of Business
College Park, MD 20742
United States
3014058794 (Phone)

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