Effects of banks on
“debt-sensitive” small businesses
Allen N. Berger
Moore School of Business, University of South Carolina, Columbia,
South Carolina, USA and
Wharton Financial Institutions Center, Tilburg University,
Tilburg, The Netherlands, and
Yale University, New Haven, Connecticut, USA
Purpose – The purpose of this paper is to identify which small businesses are most “debt sensitive”,
or most likely to be affected by banking market conditions.
Design/methodology/approach – For the primary debt sensitivity categories, the paper
hypothesizes that bank conditions are most likely to have signiﬁcant effects on ﬁrms in size classes
and industries that are “on the bubble” for credit availability (probability of credit close to 0.50), rather
than those with “relatively easy” or “relatively difﬁcult” access to credit (probability much higher or
lower, respectively). The secondary classiﬁcations also require that loans fund a substantial
proportion of assets for the ﬁrms in the category that have loans. These hypotheses are tested using a
comprehensive data set of US small businesses by size class and industry matched with variables
measuring bank market power, market structure, and efﬁciency in the ﬁrm’s local markets.
Findings – Findings show that the data are consistent with the hypotheses, with the strongest
support for the hypotheses occurring using the secondary classiﬁcations. In terms of policy
implications, the ﬁndings suggest that the credit availability of small, debt-sensitive ﬁrms may be
reduced by within-market mergers that increase concentration in rural markets, but that the more
common type of recent consolidation – creating larger banks that operate in more markets – may be
associated with an increase in credit availability for these sensitive ﬁrms. Such an increase in credit
availability would be magniﬁed if consolidation resulted in increased bank operating efﬁciency.
Originality/value – The paper offers insights into the effect of banks on “debt-sensitive” small
Keywords Banks, Small enterprises, Banking, Economic conditions, Debts, United States of America
Paper type Research paper
Much of the banking research over the last decade has focused on the effects of banks
on small businesses, but several important research and policy questions remain.
The current issue and full text archive of this journal is available at
JEL classiﬁcation – G21, G28, L11, O33
This work was partially completed while Ostromogolsky was a Research Assistant at the
Board of Governors of the Federal Reserve System, June 2003-2006.
The authors thank Ron Borzekowski, Nate Miller, and Gang Xiao for valuable help in
preparing this research, Nicola Cetorelli, George Christodoulakis, and the anonymous referees for
comments on the paper, and Reid Dorsey-Palmateer for outstanding research assistance. The
authors also thank Bob Avery, Lamont Black, Brian Bucks, Andrew Cohen, Diana Hancock,
Arthur Kennickell, and audience members at the Chicago Federal Reserve Bank Structure and
Competition conference for very constructive comments on the presentation.
Journal of Financial Economic Policy
Vol. 1 No. 1, 2009
q Emerald Group Publishing Limited