Frontiers of Entrepreneurship Research
1997 Edition

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INFORMATION ASYMMETRIES, THE BANKING RELATIONSHIP AND THE IMPLICATIONS FOR GROWTH

Christine T. Ennew, University of Nottingham
Martin R. Binks, University of Nottingham


INTRODUCTION

THE PROVISION OF FINANCE TO SMALL BUSINESSES

BANKING RELATIONSHIPS AND RELATIONSHIP PARTICIPATION

CUSTOMER RELATIONSHIPS IN THE UK BANKING SECTOR

EMPIRICAL ANALYSIS

The Quality of Service Provision
Participation in the Banking Relationship

TABLE 1 Firm Participation

TABLE 2 Bank Participation

RESULTS

TABLE 3 Impact of participation on Core Product Features

TABLE 4 Impact of Participation on Summary assessments of Banking Relationship

TABLE 5 Mean Participation Scores and Potential Bank Switching

TABLE 6 Profitability, Growth and Participation

TABLE 7 Growth Rate and Relationship Type

CONCLUSION

REFERENCES

ABSTRACT

The provision of external finance to smaller businesses is generally thought to be characterised by information asymmetries and these may lead to some form of credit rationing. To the extent that credit rationing occurs, viable enterprise and opportunities for growth may be lost. While collateral is commonly cited as a means of counteracting the information asymmetries which lead to credit rationing, an alternative mechanism is to improve the flow of information between business and bank. This is most commonly achieved through the development of a close working relationship. The success of such a relationship depends upon the willingness of both parties to involve themselves with each other and work together. This paper examines the nature of the banking relationship, paying particular attention to the idea of relationship participation and the benefits which accrue to both parties as a result of participation. Using data from over 3000 UK small firms, it is possible to identify four broad relationship types based on the degree to which the bank and the business participate in the relationship. A comparison across different relationship types suggests that there are considerable benefits associated with more participative relationships, although the implications for firm performance are more difficult to disentangle.

 

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