Banking Relationships: Effects on Debt Terms for Small Spanish Firms*

This paper analyzes the effect of banking relationships on interest rates and the probability that guarantees must be provided in a sample of small and medium‐sized enterprises (SMEs). The results indicate that SMEs that work with fewer banks obtain debt at a lower cost. This seems to suggest that concentrated banking relationships reduce the uncertainty of lending to risky firms, which translates into lower interest rates. Reduction in risk could come from greater flexibility in negotiations, increased control over the investment, and mitigation of the free‐rider problem. When the relationship is exclusive, which would represent the maximum concentration, a bank can take advantage of its monopoly position and require more guarantees from a firm. SMEs that have longer‐term relationships with their bank are more likely to be required to provide guarantees. This result seems to suggest that SMEs involved in longer‐term relationships are subject to the information monopoly of the lender.     

The institutional environment and the number of bank relationships: an empirical analysis of European SMEs

This article examines the association between creditor protection, as measured by the nature of legal rules and the quality of law enforcement, and multiple bank relationships using a unique survey sample of SMEs from 19 European countries. We find that the likelihood of multiple banking is the highest for SMEs in French-civil-law countries, next highest for German-civil-law countries, and the lowest in Scandinavian-civil-law and English-common-law countries. We also find that SMEs in countries with low legal efficiency are more likely to establish multiple bank relationships. These results seems to confirm the underlying idea in the law and finance literature that relevant loan risk for banks also arises from low quality of laws and institutions and not just from firm-specific characteristics. Banks in countries where protection of creditor rights is poor may resort to multiple banking to share this additional risk. Policy makers can use our findings to justify the necessity of improving their institutions by reducing legal formalisms and thereby, lowering the enforcement costs in the courts. This would lead to better loan contracting and enhance the flow of debt capital, which is required for a healthy and dynamic economy.     

The trade credit channel revisited: evidence from micro data of Japanese small firms

It is suggested that trade credit can be a substitute for bank loans for small- and medium-sized enterprises (SMEs) that have little access to external funding sources. Using unique cross-sectional survey data of Japanese SMEs, we conduct a deep investigation into the substitutability between bank loans and trade credit. This survey contains rich information on the suppliers of trade credit to SMEs, thus enabling the examination of the channel through which credit is provided from suppliers to customers. We find that SMEs with little access to bank credit depend more on large suppliers for trade credit. We also find that when a purchase is made from a large supplier, more credit is indeed provided in the form of trade credit. Furthermore, this channel of credit from large suppliers to SMEs is only observed for solvent customers, not for insolvent customers. Our findings suggest that trade credit plays an important role for entrepreneurial firms over the financial growth cycle. For young and small firms with little access to bank loans trade credit is an important funding source.     

Credit Risk Assessment and Relationship Lending: An Empirical Analysis of German Small and Medium‐Sized Enterprises*

We estimate a logit scoring model for the prediction of the probability of default by German small and medium‐sized enterprises (SMEs) using a unique data set on SME loans in Germany. Our scoring model helps SMEs to gain knowledge about their default risk, which can be used to approximate their risk adequate cost of debt. This knowledge is likely to lead to a detection of hold‐up problems that German SMEs might be confronted with in their bank relationships. Furthermore, it allows them to monitor their bank’s pricing behavior and it reduces information asymmetries between lenders and borrowers. Finally, it can influence their future financing decisions toward capital market‐based financing.     

External Financing,Export Intensity and Inter‐Organizational Collaborations: Evidence from Canadian SMEs*

Drawing on institutional theory, resource‐based perspective and internationalization theory, we propose that the domestic collaborations of small and medium‐sized enterprises (SMEs) have a direct positive effect on their export intensity, as well as an indirect effect through enhancing these firms' access to external financing. We test our hypotheses on a sample of 151 Canadian manufacturing SMEs and find partial support for the indirect relationship. Overall, our results suggest that domestic collaborations positively affect SMEs' access to equity financing but not to bank financing. While both equity and bank financing are found to enhance these firms' export intensity, bank financing seems to have a greater impact. The implications of these results are discussed.     

Who Benefits from Longer Lending Relationships? An Analysis on European SMEs

This paper empirically investigates the impact of lending relationships duration on SMEs financial stability. Our research hypothesis is that the balance between benefits and costs of longer bank‐firm ties may be different depending on the degree of firms' financial health. Using a large sample of European manufacturing SMEs that excludes firms that have defaulted and those with less than ten employees, we find that the overall positive effect of enduring lending relationships tends to progressively increase for more stable firms, being greater when the main bank operates nearby the firm. Our findings, yet, are conditional on firm survival and may not be generalized to the smallest of firms.     

The Interdependence between Trade Credit and Bank Lending: Commitment in Intermediary Firm Relationships

This study investigates the interdependence between trade and bank credit among 468 Portuguese small and medium‐sized enterprises (SMEs). The results show that a single bank relationship is prevalent among Portuguese SMEs, indicating that the proprietary borrower information that banks obtain through their relationship results in an information monopoly that creates a holdup problem and leads to high interest rates. Suppliers that can control their customers' credit risk may provide additional credit and thus help alleviate concerns associated with holdup costs. Trade credit is a viable alternative to short‐term debt, especially when firms' main bank is unwilling to increase its exposure to liquidity constraints.     

SMEs,foreign direct investment and financial constraints: The case of Belgium

This paper explores the problems experienced by small and medium-sized enterprises (SMEs) with international ambitions in gaining access to debt and equity finance for foreign direct investment (FDI) projects. We develop several arguments for why such small businesses are expected to face severe financing constraints for foreign investments and provide an explorative empirical study with both the demand and supply side of FDI finance. We have interviewed thirty-two Belgian SMEs that carry out FDI, five banks and five venture capitalists. Based on the SME discussions, we have composed a questionnaire that was sent to the interviewed SMEs. The information problems and lack of collateral that often characterize international investment, the home bias of financiers and the capital gearing method used by banks to evaluate small firms’ foreign projects give rise to financial constraints for SMEs’ FDI projects. The reported finance gap hinders small firms’ (international) development and leads to suboptimal home and FDI host country development.     

Does Geographic Proximity Change the Passiveness of Equity Ownership by Bank Trust?

We provide evidence that while concentrated bank trust ownership is passive with distant firms, it is nonpassive with local firms and reduce their risk‐taking. Concentrated local bank trust ownership is associated with (i) lower future firm equity beta and (ii) less uncertain corporate policies. The results cannot be explained by private information alone, are not driven by local bank trusts as a mixed debt‐equity holder, and are robust to various tests for endogeneity. We also explore channels through which local bank trusts could exert their influence, including their stabilizing function during crisis periods and joining force with local independent directors.     

Sovereign Debt Restructuring and Bank Capital

The focus of this paper is on the interaction between a bail-out loan decision of a bank to a sovereign borrower and the adequacy of the bank's capital. The new loan is granted on two conditions: First, it must improve the likelihood of repayment of the outstanding loan; second the bank should have adequate capital.We find that in general a positive relationship exists between capital and the bail out loan and between existing debt and the new loan. However, under certain circumstances a negative relationship exists between the bank's capital and the new loan. Empirical results support the main implications of the theoretical model.     

Effect of the Number of Banking Relationships on Credit Availability: Evidence from Panel Data of Spanish Small Firms

This paper investigates how the choice between single or multiple banking relationships affects credit availability for a complete panel of small and medium-sized Spanish firms. The results seem to indicate the existence of rationing, since a substitution relation has been found between trade and bank credit. We also analyse the relationship between the level of indebtedness and the interest rate for each group of firms. The results show that those SMEs that work with fewer financial intermediaries obtain fewer funds for the same increase in the interest rate, which indicates that these companies have more financial restraints.     

Accounting information quality and trust as determinants of credit granting to SMEs: the role of external audit

This study analyses whether loan officers’ perception of the accounting information quality (AIQ) and the trustworthiness of SMEs are associated with a better willingness to grant them credit. Empirical evidence is obtained from a survey of 471 bank loan officers in Spain, who are asked to answer in relation to audited and not-audited firms. Using a Structural Equation Modeling (SEM) approach, the results obtained confirm that the loan officers’ willingness to facilitate SMEs’ access to credit is positively influenced by their general perception about the AIQ, but only if it is audited. In the case of not-audited firms, AIQ does not play a direct role in credit granting decision, but is relevant in trust formation. Besides, in the case of audited firms, only the “competence” dimension of trust is relevant, whereas in not-audited firms, both “competence” and “honesty” have an impact on credit granting. “Benevolence” does not have an influence in any case. The study has implications for SMEs, banks, policy makers and auditors.     

The Moderating Influence of Broad‐Scope Trust on Customer–Seller Relationships

Trust relates not only to customer trust in individual companies (i.e., narrow‐scope trust) but also to the broader business context in which customer–seller relationships may develop (i.e., broad‐scope trust [BST]). Based on two surveys comprising 1155 bank consumers and 817 insurance consumers, respectively, this study investigates the moderating influence of BST on relationships between satisfaction, narrow‐scope trust, and loyalty and also examines the direct influence of BST on these variables. The results indicate that whereas BST negatively moderates relationships between satisfaction and narrow‐scope trust and between narrow‐scope trust and loyalty, BST positively moderates the relationship between satisfaction and loyalty. In addition, it is demonstrated that BST positively influences customer satisfaction and narrow‐scope trust. © 2012 Wiley Periodicals, Inc.     

Top management team characteristics,R&;D investment and capital structure in the IT industry

This paper is based on agency theory, resource-based and upper-echelons perspectives to examine the relationship between R&D investment and capital structure and the moderating effects of top management team (TMT) characteristics on the financing decisions of R&D investment in small and medium enterprises (SMEs). Using data for SMEs in Taiwan’s IT industry, we find that (1) SMEs involved in R&D activities tend to have lower debt levels and (2) TMT characteristics exert considerable influence on the R&D investment-financial leverage relationship in SMEs. One important implication of the empirical evidence is that for SMEs trying to compete on the basis of innovation, the TMT characteristics significantly influence financing decisions. As innovative activities increase, the selection and development of top executives, who are responsible for choosing an optimal capital structure that could keep financial costs low while providing sufficient financial resources for maintaining a continuous, uninterrupted rate of R&D, is crucial for SMEs.     

Internal vs External Financing of R&D

The empirical evidence suggests that while small firms in United States, United Kingdom and Canada rely on internal funds for financing R&D, similar firms in Japan, Germany and France have access to bank loans. In this paper, we analyze the financial decisions of small firms willing to invest in R&D. We find that their high ratio of intangible assets, along with the high risk nature of their investments, can explain their inability to raise debt in external capital markets. We also show that financing R&D with bank loans might be feasible, especially, if banks are willing to monitor the investment activities of their clients.     

How Do SMEs with Single and Multiple Owners Finance Their Operations Differently? Empirical Evidence from China

We study the impact of firm‐level characteristics on the capital structures of private small and medium‐sized enterprises (SMEs) as well as the differences between the capital structures adopted by SMEs with single and multiple owners in China. Our findings highlight the limited use of asset‐based financing by Chinese SMEs. We also find that the propensity of SMEs with single‐owners to use external debt was significantly less than those with multiple owners. Furthermore, our findings suggest that single‐owned firms are subject to a more constrained pecking order than those with multiple owners. © 2013 Wiley Periodicals, Inc.     

The impact of firm and industry characteristics on small firms’ capital structure

We study the impact of firm and industry characteristics on small firms’ capital structure, employing a proprietary database containing financial statements of Dutch small and medium-sized enterprises (SMEs) from 2003 to 2005. The firm characteristics suggest that the capital structure decision is consistent with the pecking-order theory: Dutch SMEs use profits to reduce their debt level, and growing firms increase their debt position since they need more funds. We further document that profits reduce in particular short-term debt, whereas growth increases long-term debt. We also find that inter- and intra-industry effects are important in explaining small firms’ capital structure. Industries exhibit different average debt levels, which is in line with the trade-off theory. Furthermore, there is substantial intra-industry heterogeneity, showing that the degree of industry competition, the degree of agency conflicts, and the heterogeneity in employed technology are also important drivers of capital structure.     

The Critical Role of Relationship Quality in Small- and Medium-Sized Enterprise Internationalization

ABSTRACT

Due to limited resources, small- and medium-sized enterprises (SMEs) carefully develop and leverage relationships with foreign, independent intermediaries. This article investigates “relationship quality,” a collection of intangible organizational resources in the exporter–intermediary relationship that support the internationalization and foreign performance of SMEs. Four dimensions of relationship quality—communication, cooperation, trust, and commitment—are modeled and linked to intermediary performance. Findings highlight the significance of relationship quality, its dimensions, and how they support intermediary performance. Cooperation and commitment are significant performance antecedents. Trust is a significant antecedent of commitment, and communication drives cooperation, trust, and commitment. The study provides SMEs a way to enhance the quality of relationships with, and to help improve the performance of, their intermediaries in export markets.     

Transaction services and SME internationalization: The effect of home and host country bank relationships on international investment and growth

Building on the argument put forward by North and Wallis (1994) that the transaction sector enables economic growth by lowering the costs of transacting, we investigate how internationalizing firms’ host and home country bank relationships affect their international specific investments and growth. Banks provide payment, liquidity, and risk management services, which are essential to international business relationships, yet little is known about how banks affect international business relationships. In a sample of 255 small and medium-sized enterprises (SMEs), we find that host and home country bank relationships affect the dependent variables differently. We contribute to the literature by explicating the role and effects of banks in international business relationships. Our findings have implications for understanding transaction services in international business as well as the choices made by their customers.     

Is banking competition beneficial to SMEs? An empirical study based on Italian data

Using a large panel of Italian firms, spanning the years from 1995 to 2003, this study investigates the relationship between bank debt and non-financial SMEs’ performance, evaluating whether and to what extent this link is affected by the degree of competition characterising the local credit market where firms operate. Controlling for inertia, unobserved heterogeneity and the endogeneity of some performance determinants, we find that the (negative) impact of bank debt on firms’ performance is weaker for firms running in more competitive banking markets. We interpret this result as evidence that a more intense banking competition may lead to better credit conditions for small and medium-sized firms.