Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks
The paper explores the idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. It finds 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.