NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Nathan H. Miller

Georgetown University McDonough School of Business
37th & O Streets NW
Washington DC 20057

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NBER Working Papers and Publications

January 2002Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks
with Allen N. Berger, Mitchell A. Petersen, Raghuram G. Rajan, Jeremy C. Stein: w8752
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 bette...

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