The Information Revolution and Small Business Lending: The Missing Evidence

Robert DeYoung, W. Scott Frame, Dennis Glennon, and Peter Nigro
Working Paper 2010-7
March 2010

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This paper provides empirical confirmation for Petersen and Rajan's (2002) widely accepted conjecture that information technology was the primary driver of the observed increase in small business borrower-lender distances in the United States in recent years. Using a different data source for small business loans, we show that annual increases in borrower-lender distances were slow and steady prior to 1993 (the end point in Petersen and Rajan's data) but accelerated rapidly after that. Importantly, we are able to assign at least half of this acceleration to the adoption of credit scoring technologies by the lending banks. Our tests also reveal strong statistical associations between lending distances and borrower characteristics, lender characteristics, market conditions, regulatory constraints, moral hazard incentives, and principal-agent incentives.

JEL classification: G21, O33

Key words: borrower-lender distance, credit scoring, information technology, small business lending

The authors thank Sumit Agarwal and two anonymous referees for comments on an earlier draft, Pam Frisbee for research assistance, and Dan McMillen for his generosity of time and spirit. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Robert DeYoung, University of Kansas, 226-H Summerfield Hall, School of Business, 1300 Sunnyside Avenue, Lawrence, KS 66045-7585, 785-864-1806,; W. Scott Frame, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404 498 8783,; Dennis Glennon, Economics Department, Office of the Comptroller of the Currency, 250 E Street, S.W., Washington, DC 20219-0001, 202-874-4725,; or Peter Nigro, Finance Department, Bryant University, 1150 Douglas Pike, Smithfield, RI 02917-1285, 401-232-6380,

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