Personal Guarantees, Loan Pricing, and Lending Structure in Finnish Small Business Loans*Footnote¹

1. The authors wish to thank Professor Hannu Schadéwitz and the two anonymous reviewers for their insightful comments and extensive inputs to this article. This research is a part of FINNON research project financially supported by the Academy of Finland (Decision No. 116740). The bank is gratefully acknowledged for providing access to the confidential data used in this study.

References

• Angelini, P., R. Di salvo, and G. Ferri (1998). “Availability and Cost of Credit for Small Businesses: Customer Relationships and Credit Cooperatives,” Journal of Banking and Finance 22, 925–954.
   Web of Science ®Google Scholar
• Bank of Finland (1996). Financial Markets in Finland. Bulletin. Special issue, ISBN 951–686–523–2.
   Google Scholar
• Berger, A., G. Cerqueiro, and M. Penas (2009). “Does Debtor Protection Really Protect Debtors? Evidence from the Small Business Credit Markets.” AFA 2009 San Francisco Meetings Paper. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1101309.
   Google Scholar
• Berger, A., and T. Hannan (1998). “The Efficiency Cost of Market Power in the Banking Industry: A Test of the ‘Quiet Life’ and Related Hypotheses,” Review of Economics and Statistics 80, 454–465.
   Web of Science ®Google Scholar
• Berger, A., and G. F. Udell (1995). “Relationship Lending and Lines of Credit in Small Business Finance,” Journal of Business 68, 351–381.
   Web of Science ®Google Scholar
• Berger, A., and G. F. Udell (1998). “The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle,” Journal of Banking and Finance 22, 613–673.
   Web of Science ®Google Scholar
• Berger, A., and G. F. Udell (2003). “Small Business and Debt Finance,” in Handbook of Entrepreneurship. Eds. Z. Acs and D. Audretsch. Boston, Dordrecht, London: Kluwer Academic Publishing, 299–330.
   Google Scholar
• Berger, A. N., and G. F. Udell (1990). “Collateral, Loan Quality, and Bank Risk,” Journal of Monetary Economics 25, 21–42.
   Web of Science ®Google Scholar
• Berger, A., R. Demsetz, and P. Strahan (1999). “The Consolidation of the Financial Services Industry: Causes, Consequences, and Implications for the Future,” Journal of Banking and Finance 23, 135–194.
   Web of Science ®Google Scholar
• Besanko, D., and A. V. Thakor (1987). “Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets,” International Economic Review 28, 671–689.
   Web of Science ®Google Scholar
• Bester, H. (1985). “Screening vs. Rationing in Credit Markets with Imperfect Information,” American Economic Review 75, 850–855.
   Web of Science ®Google Scholar
• Bester, H. (1987). “The Role of Collateral in Credit Market with Imperfect Information,” European Economic Review 31, 887–899.
   Web of Science ®Google Scholar
• Bester, H. (1994). “The Role of Collateral in a Model of Debt Renegotiation,” Journal of Money, Credit and Banking 26, 72–86.
   Web of Science ®Google Scholar
• Bhattacharya, S., and A. V. Thakor (1993). “Contemporary Banking Theory,” Journal of Financial Intermediation 3, 2–50.
   Google Scholar
• Binks, M., and C. Ennew (1997). “The Relationship between U.K. Banks and Their Small Business Customers,” Small Business Economics 9, 167–178.
   Web of Science ®Google Scholar
• Blackwell, D., and D. Winters (1997). “Banking Relationships and the Effect of Monitoring on Loan Pricing,” Journal of Financial Research 20, 275–289.
   Google Scholar
• Bodenhorn, H. (2003). “Short‐Term Loans and Long‐Term Relationships: Relationship Lending in Early America,” Journal of Money, Credit and Banking 35, 485–506.
   Web of Science ®Google Scholar
• Boot, A. W. (2000). “Relationship Banking: What Do We Know?,” Journal of Financial Intermediation 9, 7–25.
   Web of Science ®Google Scholar
• Boot, A. W., and A. V. Thakor (1994). “Moral Hazard and Secured Lending in an Infinitely Repeated Credit Market Game,” International Economic Review 35, 899–920.
   Web of Science ®Google Scholar
• Boot, A. W., A. V. Thakor, and G. F. Udell (1991). “Secured Lending and Default Risk: Equilibrium Analysis and Policy Implications and Empirical Results,” Economic Journal 101, 458–472.
   Web of Science ®Google Scholar
• Brick, I., and E. Palia (2007). “Evidence of Jointness in the Terms of Relationship Lending,” Journal of Financial Intermediation 16(3), 452–476.
   Web of Science ®Google Scholar
• Calcagnini, G., F. Farabullini, and G. Giombini (2007). “Loans, Interest Rates, and Guarantees: Is There a Link?,” Working Paper, presented at the Workshop “Interest rates in retail banking markets and monetary policy,” European Central Bank, Frankfurt, February 5, 2007. University of Urbino, Italy.
   Google Scholar
• Capra, C. M., M. O. Fernandes, and I. Ramirez (2001). “The Separating Role of Collateral Requirements in Credit Markets with Asymmetric Information,” Lineex Working Papers, 23/01, 1–33. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=283179.
   Google Scholar
• Caves, R., and M. Uekusa (1976). Industrial Organization in Japan. Washington, DC: Brookings Institution.
   Google Scholar
• Chan, Y., and G. Kanatas (1985). “Asymmetric Valuations and the Role of Collateral in Loan Agreements,” Journal of Money, Credit and Banking 17, 84–95.
   Web of Science ®Google Scholar
• Chan, Y., and A. V. Thakor (1987). “Collateral and Competitive Equilibria with Normal Hazard and Private Information,” Journal of Finance 42, 345–364.
   Web of Science ®Google Scholar
• Cyrnak, A., and T. Hannan (1998). “Bank Lending to Small Businesses and the Use of CRA Loan Data to Measure Market Structure,” Working Paper (Federal Reserve Board, Washington, DC.
   Google Scholar
• D'auria, C., A. Foglia, and P. M. Reedtz (1999). “Bank Interest Rates and Credit Relationships in Italy,” Journal of Banking and Finance 23, 1067–1093.
   Web of Science ®Google Scholar
• Degryse, H., and P. van Cayseele (2000). “Relationship Lending within a Bank‐Based System: Evidence from European Small Business Data,” Journal of Financial Intermediation 9, 90–109.
   Web of Science ®Google Scholar
• Edwards, J., and K. Fischer (1994). Banks, Finance and Investment in Germany. Cambridge, UK: Centre for Economic Policy Research.
   Google Scholar
• Elsas, R. (2005). “Empirical Determinants of Relationship Lending,” Journal of Financial Intermediation 14, 32–57.
   Web of Science ®Google Scholar
• Ennew, C., and M. Binks (1999). “Impact of Participative Service Relationships on Quality, Satisfaction and Retention: An Exploratory Study,” Journal of Business Research 46, 121–132.
   Web of Science ®Google Scholar
• Fischer, K. (1990). Hausbankbeziehungen als instrument der Dindung zwischen Banken und Unternehmen. Dissertation thesis, University of Bonn.
   Google Scholar
• Foglia, A., S. Laviola, and P. Marullo reedtz (1998). “Multiple Banking Relationships and the Fragility of Corporate Borrowers,” Journal of Banking and Finance 22, 1441–1456.
   Web of Science ®Google Scholar
• Greenbaum, S., G. Kanatas, and I. Venezia (1989). “Equilibrium Loan Pricing under the Bank‐Client Relationship,” Journal of Banking and Finance 13, 221–235.
   Web of Science ®Google Scholar
• Harhoff, D. and T. Körting (1998). “Lending Relationships in Germany—Empirical Evidence from Survey Data,” Journal of Banking and Finance 22, 1317–1353.
   Web of Science ®Google Scholar
• Hanley, A., C. Ennew, and M. Binks (2006). “The Price of UK Commercial Credit Lines: A Research Note,” Journal of Business Finance and Accounting 33, 932–938.
   Google Scholar
• Hernández‐cánovas, G., and P. Martínez‐solano (2006). “Banking Relationships: Effects on Debt Terms for Small Spanish Firms,” Journal of Small Business Management 44(3), 315–333.
   Web of Science ®Google Scholar
• Hoshi, T., A. Kashyap, and D. Scharfstein (1990). “The Role of Banks in Reducing the Costs of Financial Distress in Japan,” Journal of Financial Economics 27, 67–88.
   Web of Science ®Google Scholar
• Inderst, R., and H. M. Müller (2006). “A Lender‐Based Theory of Collateral,” Journal of Financial Economics 84(3), 826–859.
   Google Scholar
• Leeth, J. D., and J. A. Scott (1989). “The Incidence of Secured Debt: Evidence from the Small Business Community,” Journal of Financial and Quantitative Analysis 24, 379–394.
   Web of Science ®Google Scholar
• Longhofer, D., and J. Santos (2000). “The Importance of Bank Seniority for Relationship Lending,” Journal of Financial Intermediation 9, 57–89.
   Web of Science ®Google Scholar
• Machauer, A., and M. Weber (2000). “Number of Bank Relationships: An Indicator of Competition, Borrower Quality, or Just Size?,” CFS Working Paper No. 2000/06 https://www.ifk‐cfs.de/fileadmin/downloads/publications/wp/00_06.pdf.
   Google Scholar
• Manove, M., A. J. Padilla, and M. Pagano (2000). “Collateral vs. Project Screening: A Model of Lazy Banks,” CEPR Discussion Paper no. 2439.
   Google Scholar
• Mörttinen, L. (2000). “Essays on Loan Pricing and the Credit Channel of Monetary Policy,” Research Reports, Kansantaloustieteen laitoksen tutkimuksia 85, 1–117. Department of Economics, University of Helsinki.
   Google Scholar
• Nakatani, I. (1984). “The Role of Financial Corporate Grouping,” in Economic Analysis of the Japanese Firm. Ed. M. Aoki. New York: North Holland.
   Google Scholar
• Niskanen, J., and M. Niskanen (1999). “Pankkikilpailun ja pankkisuhteiden vaikutus yrityslainojen saatavuuteen ja ehtoihin. Tutkimus pienistä ja keskisuurista yrityksistä. (The effect of bank competition and bank relationships on the availability and terms of small business loans),” Tampereen yliopisto, Yrityksen taloustieteen ja yksityisoikeuden laitos, Sarja A1: Tutkimuksia 46: 1–120.
   Google Scholar
• Ono, A., and I. Uesugi (2005). “The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's Small Business Loan Market,” RIETI Discussion Paper Series 05‐E‐027. http://www.rieti.go.jp/jp/publications/dp/05e027.pdf.
   Google Scholar
• Orgler, Y. (1970). “A Credit Scoring Model for Commercial Loans,” Journal of Money, Credit and Banking 2, 435–445.
   Google Scholar
• Ortiz‐molina, H., and M. F. Penas (2008). “Lending to Small Businesses: The Role of Loan Maturity in Addressing Information Problems,” Small Business Economics 30(4), 361–383.
   Web of Science ®Google Scholar
• Peltoniemi, J. (2004). “The Value of Relationship Banking: Empirical Evidence on Small Business Financing in Finnish Credit Markets,” Acta Universitatis Ouluensis Oeconomica, G15. Oulu University Press.
   Google Scholar
• Peltoniemi, J. (2007a). “Sources of the Benefits of Relationship Banking: Evidence from Small Business Financing in Finland,” Journal of Financial Services Research 31(2–3), 153–171.
   Google Scholar
• Peltoniemi, J. (2007b). “Collateral, Borrower Risk, and Relationship Banking,” The Finnish Journal of Business Economics 4, 393–414.
   Google Scholar
• Petersen, M., and R. Rajan (1994). “The Benefits of Lending Relationships: Evidence from Small Business Data,” Journal of Finance 49, 3–37.
   Web of Science ®Google Scholar
• Petersen, M., and R. Rajan (1995). “The Effect of Credit Market Competition on Lending Relationships,” Quarterly Journal of Economics 110, 407–433.
   Web of Science ®Google Scholar
• Pozzolo, A. (2002). “Secured Lending and Borrowers' Riskiness,” SSRN Working Paper series. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=302124.
   Google Scholar
• Pozzolo, A. (2004). “The Role of Guarantees in Bank Lending,” EFMA 2004 Basel Meetings Paper. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=498982.
   Google Scholar
• Rajan, R., and G. Winton (1995). “Covenants and Collateral as Incentives to Monitor,” Journal of Finance 50, 1113–1146.
   Web of Science ®Google Scholar
• Scheelings, R. (2006). “Firm Risk and Collateralized Asset Choice in Small Business Bank Lending: Theory and Evidence,” SSRN Working Paper series. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1090012.
   Google Scholar
• Scott, J. A., and W. C. Dunkelberg (1999). “Bank Consolidation and Small Business Lending. A Small Firm Perspective,” in Business Access to Capital and Credit. A Federal Reserve System Research Conference. Eds. J. L. Blanton, A. Williams and S. L. W. Rhine. Washington, DC: Federal Reserve, 328–361.
   Google Scholar
• Sharpe, S. (1990). “Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationship,” The Journal of Finance 45, 1069–1089.
   Web of Science ®Google Scholar
• Thakor, A., and R. Callaway (1983). “Costly Information Production Equilibria in the Bank Credit Market with Applications to Credit Rationing,” The Journal of Financial and Quantitative Analysis 18(2), 229–256.
   Google Scholar
• Thakor, A. V. (1995). “Financial Intermediation and the Market for Credit,” in Handbooks in OR and MS, 9 Eds. R. A. Jarrow, V. Maximovic, and W. T. Ziemba. Amsterdam, The Netherlands: Elsevier, 1073–1103.
   Google Scholar
• Weinstein, D., and Y. Yafeh (1998). “On the Costs of a Bank Centered Financial System: Evidence from the Changing Main Bank Relations in Japan,” Journal of Finance 53, 635–672.
   Web of Science ®Google Scholar
• Welch, I. (1997). “Why Is Bank Debt Senior? A Theory of Asymmetry and Claim Priority Based on Influence Costs,” Review of Financial Studies 10, 1203–1236.
   Google Scholar
• White, H. (1980). “A Heteroskedasticity‐Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity,” Econometrica 48(4), 817–838.
   Web of Science ®Google Scholar