Collateral versus Lending Relationships: shocks to small business credit in the Great Recession

Megha Patnaik

No 17003, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Small businesses can overcome asymmetric information in credit markets using collateral and by forming lending relationships. Differences in whether a small business is predominantly "collateral-dependent" or "relationship-dependent" can lead to a differential impact of different types of credit shocks during recessions. I use novel transaction-level data from a leading online accounting software in the US for a large and representative sample of small businesses, for whom I measure two types of shocks at the firm level: bank insolvencies, and changes in real estate prices at the business owner's residential location. I find that bank insolvencies lead to a substantial decline in firm credit, however the effect is driven by the effects on relationship-dependent firms. In contrast, house price movements significantly affect the credit of collateral-dependent firms as expected, but do not affect the credit of firms that are predominantly dependent on relationships. The analysis thus reveals that credit shocks with different origins can have differential impact within the small business universe, due to heterogeneity in firms' sources of borrowing.

Keywords: Great recession; Small businesses; Credit shocks (search for similar items in EconPapers)
Date: 2022-02
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17003 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:17003

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17003

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().