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Cooperative lenders and the performance of small business loans

Miwako Nitani and Nicolas Legendre

Journal of Banking & Finance, 2021, vol. 128, issue C

Abstract: This study reports that small business loans advanced by cooperative lenders have a significantly lower probability of default than those disbursed by mainstream banks—at least for the first four years post disbursement, during which default costs are highest. Default rates are particularly low among loans to younger, and, to an extent, smaller, firms; and loans to firms that had experienced significant changes in their business environment post-disbursement. These results are consistent with the argument that cooperatives face relatively less severe information asymmetry because their close community ties facilitate soft information production and their governance structures embed self-selection and peer monitoring mechanisms (e.g., Angelini, Di Salvo & Ferri, 1998). Comparison of loan portfolio performance between co-ops and small regional banks suggest that both close community ties and governance structure contribute to cooperatives’ lower default rates. Results are robust to distance and competition effects, and to various alternative explanations.

Keywords: Cooperative banks; Relationship lending; Information asymmetry; SME lending; Loan default (search for similar items in EconPapers)
JEL-codes: D82 G21 H81 L33 P13 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jbankfin.2021.106125

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Handle: RePEc:eee:jbfina:v:128:y:2021:i:c:s0378426621000832