TY - JOUR AU - Berger,Allen N. AU - Miller,Nathan H. AU - Petersen,Mitchell A. AU - Rajan,Raghuram G. AU - Stein,Jeremy C. TI - Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks JF - National Bureau of Economic Research Working Paper Series VL - No. 8752 PY - 2002 Y2 - January 2002 UR - http://www.nber.org/papers/w8752 L1 - http://www.nber.org/papers/w8752.pdf N1 - Author contact info: Allen N. Berger University of South Carolina 1705 College Street Columbia, SC 29208 Tel: 803-777-8440 Fax: 803-777-6876 E-Mail: aberger@moore.sc.edu Nathan H. Miller Board of Governors Federal Reserve System Mail Stop 153 20th and C Streets, NW Washington, DC 20551 Tel: 202-736-5543 E-Mail: nmiller@frb.gov Mitchell A. Petersen Kellogg School of Management Northwestern University 2001 Sheridan Road Evanston, IL 60208 Tel: 847/467-1281 Fax: 847/491-5719 E-Mail: mpetersen@northwestern.edu Raghuram Rajan Booth School of Business University of Chicago 5807 South Woodlawn Avenue Chicago, IL 60637 Tel: 773/702-4437 Fax: 773/702-0458 E-Mail: raghuram.rajan@ChicagoBooth.edu Jeremy C. Stein Department of Economics Harvard University Littauer 209 Cambridge, MA 02138 Tel: 617/496-6455 Fax: 617/496-7352 E-Mail: jeremy_stein@harvard.edu AB - Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally 'difficult' credits, such as firms that do not keep formal financial records. Moreover, controlling for the endogeneity of bank-firm matching, large banks lend at a greater distance, interact more impersonally with their borrowers, have shorter and less exclusive relationships, and do not alleviate credit constraints as effectively. All of this is consistent with small banks being better able to collect and act on soft information than large banks. ER -