Date Added: Jun 2010
This paper studies the Japanese credit scoring market using data on 2,000 SMEs and a small business credit scoring model widely used in the market. After constructing a model for determining a bank's profit maximization, the authors find the optimum loan sizes and profit levels, and point out some lending pitfalls based on small business credit scoring. The authors show that solving the problems of adverse selection and window dressing are the most important things to do to increase the profitability of SBCS lending. In addition, omitted variable bias and transparency of financial statements are also important.