Geographical location: does distance matter or what is the value status of soft information?

Abstract

Purpose

This study aims to examine empirically the relationship between loan denials and lender distance and location.

Design/methodology/approach

This study uses the 2003 Survey of Small Business Finance (SSBF) to draw the sample. This survey, conducted by the Board of Governors of the Federal Reserve, collects information on small businesses' use of financial services. In total the survey gathered information representing 4,240 firms (all sample firms have fewer than 500 employees). A number of statistical tests are conducted to test the relationship between loan denials and lender characteristics.

Findings

The results of this study indicate that credit scores have no impact on the geographical location and lender distance; however, lender distance decreases with the length of relationship with the lender and the age of the business. This suggests that informationally opaque businesses seek out lenders nearby to maximize the value of soft information, whereas established businesses put no value on that. However, the probability of loan denial is not affected by the distance between the borrower and the lender. At the same time borrowers in rural areas are more likely to be denied. Thus, there seems to be a location effect in lending.

Originality/value

This study closes a gap in the literature with regard to the value of soft information in light of increasing bank consolidation. Furthermore, this paper uses borrower data, making this – to the authors' knowledge – the first study on lending distance that does not utilize lender data.

Citation

Rauterkus, A. and Munchus, G. (2014), "Geographical location: does distance matter or what is the value status of soft information?", Journal of Small Business and Enterprise Development, Vol. 21 No. 1, pp. 87-99. https://doi.org/10.1108/JSBED-03-2013-0026