Bank involvement with SMEs: Beyond relationship lending

Are There Non-linear Effects of Banking Relationships and Ownership Concentration on Operational Performance? Empirical Evidence from Portuguese SMEs Using Cross-section Analysis and Panel Data

“…Whilst it is true that we find arguments that indicate size has a positive effect on the company's operational performance, supported by economies of scale and reduced fixed costs (Larmou and Vafeas, 2010) and in the diversified range of products (services) that produces (renders) (Torre et al, 2010), it is no less true that arguments can be found that indicate the opposite effect. In small and micro enterprises in particular, ownership is highly concentrated and hence the simultaneous role of owner and manager, by an individual or family, characterized by a reduced propensity to risk and very careful analysis of investments may condition performance.…”

“…The presence of information asymmetries in the banking relationship causes problems whose solution has costs, including agency costs. These are particularly felt when those applying for credit are small size and/or tend to be opaque, as is the case with SMEs (Psillaki 1995, Torre et al, 2010.…”

“…The difficulty in distinguishing "good" companies from "bad" ones creates the first obstacles to credit access increased by the significant presence of the latter (Berndt andGupa, 2009, Ivashina, 2009). Moreover, the creditor bank may find difficult to control the company's behavior after celebrating the credit agreement, causing so-called moral hazard (Torre et al, 2010). Under these circumstances, the bank will require a priori interest rates and higher collateral as well as more restrictive contractual terms.…”

“…In many circumstances access to credit is excluded for firms which are more highly exposed to these kinds of problems (Torre et al, 2010). Adverse selection promotes an increase in the interest rate and causes two effects of conflicting signals about the bank's expected return: on the one hand, in the case of customers servicing their debt, expected return is seen to increase; on the other hand, in the case of default, risk increases and the return decreases (Stiglitz and Weiss, 1981).…”

“…These include imposing contractual obligations on the borrower's credit, whether in terms of providing information and transparency, or through constraints on freedom of action. In this process SMEs are faced with added difficulties due to either the lack of economies of scale they provide the financing bank, or by virtue of the high volatility of results they present (De la Torre et al, 2010, Castelli et al, 2012. Thus, the inability to quantify inherent risk, banks ration credit imposing debt ceilings.…”