Small Business Lending and Social Capital: Are Rural Relationships Different?

Authors: Robert DeYoung, Dennis Glennon, Peter Nigro & Kenneth Spong, June 2012

Abstract: Rural communities often are described as places where “everyone knows each other’s business.” Such intra-community information is likely to translate into a stock “social capital” that supports well-informed financial transactions (Guiso, Sapienza and Zingales 2004).

We investigate whether and how the “ruralness” of small banks and small business borrowers influences loan default rates, using data on over 18,000 U.S. Small Business Administration (SBA) loans originated and held by rural and urban community banks between 1984 and 2001. These data provide a good test of the value of soft information and lending relationships because (a) these borrowers tend to be smaller, younger, and more credit-challenged than other small businesses and (b) these loans were originated largely before the advent of small business credit scoring and securitization, and hence they were held in portfolio and put some bank capital directly at risk.

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