The importance of financial market development on the relationship between loan guarantees for SMEs and local market employment rates

Craig E. Armstrong, Ben Craig, William E. Jackson and James Thomson

No 1020, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: We empirically examine whether a major government intervention in the small-firm credit market yields significantly better results in markets that are less financially developed. The government intervention that we investigate is SBA-guaranteed lending. The literature on financing small and medium size enterprises (SMEs) suggests that small firms may be exposed to a particular type of market failure associated with credit rationing. And SMEs in markets that are less financially developed will likely face a greater degree of this market failure. To test our hypothesis, we use the level of bank deposits per capita as our relative measure of financial market development, and we use local market employment rates as our measure of economic performance. After controlling for the appropriate cross-sectional market characteristics, we find that SBA-guaranteed lending has a significantly more (less) positive impact on the average annual level of employment when the local market is relatively less (more) financially developed. This result has important implications for public policy directives concerning where SBA-guaranteed lending should be directed.

Keywords: Small Business Administration; Financial markets; small business finance; Employment (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ent and nep-ure
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DOI: 10.26509/frbc-wp-201020

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