Distance Still Matters: The Information Revolution in Small Business Lending and the Persistent Role of Location, 1993-2003

47 Pages Posted: 1 Mar 2010

See all articles by Kenneth P. Brevoort

Kenneth P. Brevoort

Board of Governors of the Federal Reserve System

John A. Holmes

Johns Hopkins University

John D. Wolken

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 17, 2009

Abstract

In a seminal article on small business lending, Petersen & Rajan (2002) argue that technological changes have revolutionized small business lending markets, weakening the reliance of small businesses on local lenders and increasing geographic distances between firms and their credit suppliers. While their data only cover through 1993, they conjecture that the pace of change accelerated after 1993. Using the 1993, 1998, and 2003 Surveys of Small Business Finances (SSBFs), we test whether the distance changes identified by Petersen and Rajan continued or accelerated during the following decade. Using a novel application of Oaxaca‐Blinder decomposition, we identify the extent to which specific observable characteristics are associated with distance changes and draw three conclusions. First, while distances increased between 1993 and 1998 at a faster rate than found by Petersen & Rajan, distance increases appear to have halted or possibly reversed between 1998 and 2003. Second, rather than increasing proportionally for all small firms, distance increases were uneven across firms over the decade, with higher credit quality firms and firms with more experienced ownership realizing greater gains in distance than other firms. Finally, distances increased faster at older firms and, regardless of firm age, increases in distance have only affected some product types, primarily those involving asset‐back loans (including mortgages). For relationships that involved the provision of either lines of credit or multiple types of credit, distances increased very little or not at all during the decade. This analysis provides a detailed and nuanced view of how the market for small business credit has evolved during a period of rapid technological change.

Keywords: Distance, small business, credit

JEL Classification: G21, R12

Suggested Citation

Brevoort, Kenneth and Holmes, John A. and Wolken, John D., Distance Still Matters: The Information Revolution in Small Business Lending and the Persistent Role of Location, 1993-2003 (December 17, 2009). FEDS Working Paper No. 2010-08, Available at SSRN: https://ssrn.com/abstract=1559989 or http://dx.doi.org/10.2139/ssrn.1559989

Kenneth Brevoort (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

John A. Holmes

Johns Hopkins University ( email )

Baltimore, MD

John D. Wolken

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2503 (Phone)

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