Small Business and the Value of Community Financial Institutions

This paper examines whether community banks have a niche in the production of soft information when lending to small firms. A composite measure of soft information production is created from owner ratings of bank performance characteristics using survey data from a national sample of U.S. small firms. These characteristics capture some important aspects of soft information such as the bank’s knowledge of the owner’s business. This composite measure is related to the size of the owner’s primary bank, a measure of the intensity of market competition and proxies for the strength of banking relationships. After controlling for several sources of endogeneity, this composite measure is found to be significantly higher if the owner currently banks at a CFI and experiences less loan officer turnover.