Knows Me and My Business: The Association between Preference for Relational Governance and Owners' Choice of Banks

Abstract

We explore the relative importance of relational and economic preferences in small business owners' choice of a primary bank. We measured preferences directly at three points within 14 years and found that business owners' preference for relational versus economic governance was associated with the type of bank chosen and that the effect of relational preference remained relatively stable over time. Our findings support the idea that a preference for social relations might shape even the most straightforward economic decisions and suggest that variation in this preference is large, persistent enough to support business opportunities for small firms, including small banks.

Notes

1 Although some firms use more than one bank, it is common for small firms, such as those in our sample, to do most of their banking with a primary bank. In the 2001 survey, almost 60 percent of the respondents reported using one bank only, with 27 percent reporting using two; in the 1995 survey, the percentages were 63 and 25, respectively. Although our data do not tell us whether the respondents were thinking about their primary bank when answering the survey, we did include “number of banks” as a control variable in 1995 and 2001, and this variable had no significant impact on the results reported further.

2 The “social contact with loan officer” item was used in 1995 and 2001; in 1987, the wording for this item was “deal with one person only.”

3 See CFR, 12 USC 1422(13). During the period of our study, community banks were defined as banks with total assets that averaged under $500 million for the previous three years as of the date of enactment, with adjustments made annually based on consumer price index of inflation.

4 For the 1987 survey, a Herfindahl‐Hirshmann index could not be used because zip codes were not reported.

Additional information

Notes on contributors

Tl Hill

TL Hill is associate professor of strategic management at Temple University Fox School of Business.

Jonathan Scott

Jonathan Scott is professor of finance at Temple University Fox School of Business.