#07-04
The Effects of Banks on "Debt-Sensitive" Small Businesses
Allen N. Berger and Philip Ostromogolsky, July 2006
Abstract: We try to identify which small businesses are most “debt sensitive,” or most likely to be affected by banking market conditions. For our primary debt sensitivity categories, we hypothesize that bank conditions are most likely to have significant effects on firms in size classes and industries that are “on the bubble” for credit availability (probability of credit close to 0.50), rather than those with “relatively easy” or “relatively difficult” access to credit (probability much higher or lower, respectively). Our secondary classifications also require that loans fund a substantial proportion of assets for the firms in the category that have loans. We test the hypotheses by using a comprehensive data set of U.S. small businesses by size class and industry matched with variables measuring bank market power, market structure, and efficiency in the firm’s local markets. We find the data to be consistent with the hypotheses, but not all of the bank conditions are significant. The support for the hypotheses is strongest using the secondary classifications.
Keywords: Banks, Small Business, Concentration, Community Banking, Efficiency.
JEL classifications :G21, G28, L11, O33.
