Information Verifiability, Bank Organization, Bank Competition and Bank-Borrower Relationships

35 Pages Posted: 30 Aug 2006  

Masaji Kano

Osaka Prefecture University

Hirofumi Uchida

Kobe University - Graduate School of Business Administration

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

Wako Watanabe

Osaka University - Institute of Social and Economic Research (ISER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2006

Abstract

This paper investigates whether the benefits of bank-borrower relationships differ depending on three factors identified in the theoretical literature: verifiability of information, bank size and complexity, and bank competition. We extend the current literature by analyzing how relationship lending affects loan contract terms and credit availability in an empirical model that simultaneously accounts for all three of these factors. Also, our unique data set of Japanese SMEs allows us to examine for the first time using micro firm data the value of information verifiability in the form of audited financial statements in setting loan contract terms. We find that firms benefit most from bank-borrower relationships when they do not have audited financial statements and when they borrow from small banks in less competitive markets, which is consistent with a number of different theoretical studies.

Keywords: Bank-Borrower Relationships, Small Business, Loan Interest Rate, Collateral, Credit Availability

JEL Classification: G21, G31, L11, L13, L22

Suggested Citation

Kano, Masaji and Uchida, Hirofumi and Udell, Gregory F. and Watanabe, Wako, Information Verifiability, Bank Organization, Bank Competition and Bank-Borrower Relationships (February 2006). Available at SSRN: https://ssrn.com/abstract=926975 or http://dx.doi.org/10.2139/ssrn.926975

Masaji Kano

Osaka Prefecture University ( email )

1-1 Gakuen-Cho
Sakai, Osaka 599-8531
Japan

Hirofumi Uchida (Contact Author)

Kobe University - Graduate School of Business Administration ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501
Japan
81-78-803-6949 (Phone)

HOME PAGE: http://www.b.kobe-u.ac.jp/~uchida

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Wako Watanabe

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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