Do Firms Get the Financing They Want?
Measuring Credit Rationing Experienced
Alec R. Levenson
by Small Businesses in the U.S.
Kristen L. Willard
Small Business Economics
14: 83–94, 2000.
2000 Kluwer Academic Publishers. Printed in the Netherlands.
ABSTRACT. This paper measures the extent to which small
businesses in the United States in the late 1980s were able to
access the external credit finance they desired. We argue that
a comprehensive definition of credit rationing must account
for both (a) creditworthy firms that apply for and are denied
financing, and (b) creditworthy firms that decide not to apply
for desired external financing, given expectations about how
long it may take to obtain financing and the evolution of
Data from a national survey of small businesses shows that
only 2.14 percent of firms did not obtain the funding for which
they applied in 1987–88. Another 2.17 percent may have faced
some short-run constraints on investment: they were initially
denied by lenders but received the credit for which they
applied by the end of the sample period. Finally, an additional
4.22 percent of firms are estimated to have been discouraged
from applying because of expected denial.
Constrained firms are smaller, younger, and more likely to
be owned by their founders than those firms that successfully
applied for external finance. The total number of credit
constrained firms seems quite small, particularly because we
cannot distinguish empirically between creditworthy and non-
creditworthy firms. Thus the extent of true credit rationing
appears quite limited.
This paper measures the extent to which small
businesses in the United States in the late 1980s
were able to access the external credit finance they
desired. Direct measures of firms’ desire for credit
have been unavailable previously. Consequently,
the early empirical literature on credit constraints
faced by firms looked for indirect evidence,
examining the extent to which the interest rates
charged for commercial loans responded to
changes in open market interest rates. Goldfeld
(1966) and Jaffee (1971) found that commercial
loan rates were slow to adjust to changes in open
Similarly, Sealy (1979) found
evidence that the commercial loan market is
characterized by periods of disequilibrium, such
that excess supply or demand are only partially
reduced by interest rate changes.
More recently, Berger and Udell (1992), using
data on individual commercial loan contracts, con-
firmed the finding of earlier macroeconomic
studies that loan rates are “sticky,” but questioned
the economic significance of rationing in the U.S.
because other features of loan contracts seem
inconsistent with significant credit rationing:
Specifically, loans issued under commitments are
about as “sticky” as loans that are issued without
a commitment, even though commitment loans are
typically extended to clients about whom the
issuer has extensive information. Perhaps more
troublesome for the credit rationing story, Berger
and Udell show that the fraction of loans issued
under commitments (and therefore not “discre-
tionary” for the issuer) does not rise during tight
credit periods, as one would expect if financial
institutions cut back discretionary lending during
Final version accepted on October 20, 1999
Alec R. Levenson
Center for Effective Organizations
University of Southern California
1250 Fourth Street, Second Floor
Santa Monica, CA 90401, U.S.A.
Kristen L. Willard
Graduate School of Business
3022 Broadway Room 608 Uris Hall
New York, NY 10027, U.S.A.