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LOAN SEARCH AND BANKING RELATIONSHIPS

By William C. Dunkelberg, Michael A. Leeds and Jonathan A. Scott

Abstract

This paper examines the determinants of small firm search for business financing using survey data from a sample of over 2,700 firms. Twenty-five percent of the firms searched at more than one source before they were successful, turned down or gave up. We develop a model of loan search where the firm seeks another loan offer if the net gain from search exceeds the reservation profit level, which is a function of profit level without the loan, time preference of the firm, the expected cost of the loan, and the cost of search. Stronger banking relationships reduce the variance of the expected cost of the loan and thus reduce the chance of an additional search. Survey proxies for all of the key variables are significant in explaining the probability of searching at more than one source. LOAN SEARCH AND BANKING RELATIONSHIPS 1

Year: 2004
OAI identifier: oai:CiteSeerX.psu:10.1.1.195.4930
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