Bank switching of US small businesses: New methods and evidence

Zhang, Song, Liang, Han, Kallias, Konstantinos and Kallias, Antonios ORCID: https://orcid.org/0000-0002-9431-7222 2022. Bank switching of US small businesses: New methods and evidence. Review of Quantitative Finance and Accounting 58 , pp. 1573-1616. 10.1007/s11156-021-01030-y

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Abstract

Despite being informationally opaque, small firms often switch from their primary financial institution to transactional lenders, with the relationship banking theory invoking the holdup problem as a culprit explanation. Using US evidence and an estimation strategy that overcomes traditional shortcomings in small business research, our study captures the determinants and, for the first time, the ex post effects of the switching decision. We find that switching is less likely when the primary financial institution is a nearby bank associated with quality services and connected to the firm via other business or social relationships. Small firms become more loyal as they grow in size and pursue nonmortgage credit. Outside the primary relationship, both loan approval and borrowing cost are adversely impacted, however loan maturities are longer. Moreover, the likelihood of pledging collateral remains unaffected, provided that the type of collateral is least sensitive to the borrower’s information environment. Jointly, our findings describe a trade-off inconsistent with the holdup problem, and an opportunity for banks to enhance customer loyalty by improving aspects of the relationship unrelated to the terms of credit.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Additional Information:	This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made.
Publisher:	Springer
ISSN:	0924-865X
Date of First Compliant Deposit:	8 December 2021
Date of Acceptance:	30 November 2021
Last Modified:	10 May 2023 22:57
URI:	https://orca.cardiff.ac.uk/id/eprint/145856

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