Relationship Banking and SMEs: A Theoretical Analysis

Timo Baas and Mechthild Schrooten

Small Business Economics, 2006, vol. 27, issue 2, 127-137

Abstract: Reliable information on small- and medium-sized enterprises (SMEs) is rare and costly for financial intermediaries. Therefore relationship banking is often considered as the appropriate lending technique. In this paper we offer a theoretical model to analyze relationship banking and the pricing behavior of banks in a Bertrand competition framework with monitoring costs. We show that the lack of reliable information leads to comparable high interest rates even if a long-term relationship between borrower and bank exists. The paper offers a theoretical explanation why SMEs often are faced with borrowing constraints. Copyright Springer 2006

Keywords: accounting; financial constraints; relationship banking; small and medium sized enterprises; D43; D82; G21; M41 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (56)

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Working Paper: Relationship Banking and SMEs: A Theoretical Analysis (2005)
Working Paper: Relationship banking and SMEs: a theoretical analysis (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:sbusec:v:27:y:2006:i:2:p:127-137

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DOI: 10.1007/s11187-006-0018-7

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