The Information Revolution and Small Business Lending: The Missing Evidence
Borrower-lender distance; Credit scoring; Information technology; Small business lending
Springer Science & Business Media B.V.
This paper provides empirical confirmation for Petersen and Rajan’s (J Finance 57:2533–2570, 2002) widely accepted conjecture that information technology was the primary driver of the observed increase in small business borrower-lender distances in the U.S. in recent years. Using a different data source for small business loans, we show that annual increases in borrower-lender distances were slow and steady prior to 1993 (the end point in Petersen and Rajan’s data) but accelerated rapidly after that. Importantly, we are able to assign at least half of this acceleration to the adoption of credit scoring technologies by the lending banks. Our tests also reveal strong statistical associations between lending distances and borrower characteristics, lender characteristics, market conditions, regulatory constraints, moral hazard incentives, and principal-agent incentives.
Recommended CitationDeYoung, Robert; Frame, W.; Glennon, Dennis; and Nigro, Peter J., "The Information Revolution and Small Business Lending: The Missing Evidence" (2011). Finance Journal Articles. Paper 1.