BANKS’ ASSESSMENT OF SMALL GROWING FIRMS’ SUCCESS FACTORS
Volker Bruns, Jönköping International Business School
(JIBS)
Johan Wiklund, Stockholm School of Economics and JIBS
Principal Topic
Empirical research suggests that limited access to debt capital is a major factor hampering small business growth. Due to information asymmetry and risk aversion, banks are reluctant to lend to small firms that plan large investments for new growth opportunities. While several factors that may affect the likelihood of banks granting credit have been identified in the literature, little is known about their decision making.
An extensive literature review suggested that eight factors are particularly influential in determining if banks will grant credit: competence within the project; past profitability; financial standing; collateral offered; the firm’s/owners share of the investment; the CEO’s experience; the firm’s risk proclivity; and the degree of strategic planning. Hypotheses were developed arguing that each of these factors influence the banks’ assessment of granting credit and that risk proclivity interacts with the other variables in predicting the assessment. In addition, the characteristics of the lending officer likely affect their assessment.
Method
In this conjoint experiment, 114 Swedish lending officers were instructed to indicate the banks’ likelihood to grant the credit requests for 16 hypothetical small firms. Data were analyzed using multiple regression.
Results and Implications
Findings suggest that the eight factors identified, apart from strategic planning, affect chances of receiving credit. Further, risk proclivity interacts with collateral offered and with financial standing. Low risk proclivity does not offset the drawback of having little collateral, while a strong financial standing is associated with higher chances of receiving credit regardless of risk proclivity.
Our use of conjoint experiments to investigate decision making overcomes problems with respondents’ rationalization of decisions and recall bias present in most previous studies. Understanding the decision making of lending officers provides valuable knowledge for small growing firms as well as for banks. Examining regression coefficients, a strong track record, as indicated by profitability and financial standing, appears more important than factors related to the bank’s financial risk taking in the new project, such as collateral provided, or the firm’s share of the investment. This suggests that lending officers put greater emphasis on factors that affect the likelihood of a project being successful than on factors influencing the potential loss to the bank, should the project fail.
CONTACT: Volker Bruns, JIBS, Box 1026, 55451 Jönköping, Sweden; (T) +46-36-157503; (F) +46-36-161069; volker.bruns@jibs.hj.se
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