Conclusions

This research is motivated by the improvements in the SBCS for small business lending after the mid and late-1990s and tries to understand the changing small business lending structure. This study initially uses the 1987, 1993, and 2003 SSBF datasets to answer whether the importance of relationships in small business lending weakened in 2003. To answer this question, this research applies a survey linear regression for interest rate premiums and a survey logit model for collateral and guarantor requirements on relationship variables, for recently received LOCs. Different than the literature, the importance of borrower-lender relationships over time is directly compared in a single regression.

This study finds that none of the relationship variables explained interest rate premiums in 2003, even though the relationship variable, whether the firm has checking account with the lender, explained interest rate premiums before the mid-1990s. There is also a decline in the magnitude of the coefficient for the checking account variable in 2003. This result indicates that the effect for the checking account variable declined over time for the interest rate premium. In addition to this relationship variable effect, this study also finds that some of the hard-information based variables such as corporate organizational form, profitability, accounts receivable collection period, age, metropolitan area, and Herfindahl index gained significance in explaining interest rate premiums in 2003 even though they were not significant before the mid-1990s. Furthermore, the sales variable was significant in both periods and the magnitude effect for the sales variable increased in 2003.

For collateral and guarantor requirements, this study shows that the distance, length of relationship, savings account, and previous loan accounts variables were significant variables that

46 (ln(1+15)-ln(1+10))*0.037*100=1.386 percent

helped to explain collateral and guarantor requirements before the mid-1990s but not in 2003. This study also finds that none of the relationship variables explain collateral and guarantor requirements in 2003. Moreover, some of the hard-information based variables such as industry variables,

corporate organizational form, and leverage ratio helped to explain collateral and guarantor requirements in 2003 even though they did not help to explain them before the mid-1990s.

Based on these results, there is enough evidence to conclude that the effect of borrower-lender relationships on interest rate premiums and collateral and guarantor requirements has

weakened over time. The findings for this study are consistent with the literature that there have been changes in the small business lending sector. This change might be attributed to technological

improvements and use of hard information such as SBCS models in small business lending. For instance, there has been more competition for lending to small businesses by larger banks and non-depository financial institutions that specialize in the use of hard information based lending models.

Moreover, during the 1980s and 1990s, with the consolidation of the banking sector, larger banks dominated the banking sector and started lending to small businesses.

Due to the competitiveness of the small business market and the increased use of hard information in small business lending, lenders, specifically small banks, might want to reconsider their lending procedures. When evaluating characteristics of small business borrowers, small banks might give more emphasis to hard-information based models such as the SBCS, even though it may be initially costly to adopt these SBCS models. In particular, small banks would then be better able to compete with non-depository financial institutions and larger banks.

Furthermore, the small businesses that meet the criteria of SBCS models will have a larger pool of lenders to choose from; for example, small banks, larger banks, and non-depository financial institutions and small businesses will have greater bargaining power when borrowing. These small businesses will also benefit from lower costs resulting from more favorable loan contract terms. For instance, with SBCS, lenders lower their cost of lending due to lower cost of monitoring. The lender can then reflect these lower costs in more favorable loan contracts with borrowers.

Additionally, understanding changes in the small business lending structure might help to better comprehend small businesses' financing sources for possible investment opportunities.

Understanding the changes in small business lending structure will also help to improve efficiency in the small business lending system. However, it is also worth noting that there will always be small businesses that will not be able to afford to provide public information and that will still depend on relationship-based lending.

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This paper would have benefited from a dataset that has more recent information regarding small businesses and their relationship based lending. Unfortunately, the SSBF dataset is limited with the 2003 year as the most recent year. Moreover, a future study might include in the model small business credit scores for firms as additional explanatory variables. This might help to better understand the reasons behind changes in the small business lending sector. Even though the credit score information is not available for the 1987 and 1993 SSBF datasets, it is available for the 1998 and 2003 datasets. By using the 1998 and 2003 datasets, a credit score model can be constructed and the small business credit scoring information can be estimated for the years 1987 and 1993.