Abstract
We study the effect of relationship lending on small firms' failure probability using a uniquely rich data set comprised of information on individual loans of a large number of small firms in Colombia. We control for firm-specific variables and find that small firms involved in long-term liaisons with commercial banks have a significantly lower probability of becoming bankrupt than otherwise identical firms not involved in a long-term credit relationship. We also find that small firms with multiple banking relationships face a lower failure hazard than otherwise identical firms involved in a unique long-term relationship.
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1. The Financial Superintendence of Colombia is the regulator of Colombia's financial sector.
2. The Corporations Superintendence is the Firm's/Corporation's Supervisory Agency in Colombia.
3. In Colombia, the firms' i.d. code is known as the ‘NIT’.
4. The juridical definition of failure is arguably the most adequate because it provides an objective criterion that allows firms to be separated easily into two distinct populations.
5. Firm size could have been alternately measured as market value, sales or number of employees.
6. Firms of medium and large sizes have statistically identical survivor functions according to different tests. Thus, both groups were pooled into a unique group of firms.
7. The hazard function of medium and large firms exhibited a non-monotonic behaviour as well.
8. The parametric models, estimated for comparison purposes, are estimated by maximum likelihood.
9. Hertz-Picciotto and Rockhill (1997) show that the Efron method for handling ties is to be the preferred, especially when the sample size is small either due to heavy censoring or from the outset.