Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks

Unlike previous research that focused on how technology influences asset ownership, the focus here is on how the environment of a firm impacts its business procedures and business activities.Also explored are several models that hypothesize about the lending habits of small and large banks. Although many of these models are based on theoretical support, this research seeks to find empirical support for them.Previous literature is reviewed, with this research serving as the basis for the hypotheses concerning bank size, and the willingness to accept hard or soft information. To test these hypotheses, data were collected from the Federal Reserve’s 1993 National Survey of Small Business Finance.Bank and market characteristics and firm and contract characteristics were analyzed.The findings indicate that large banks tend to lend to larger firms with good accounting records.Compared to small banks, large banks also have a tendency to lend across a larger distance, to interact more impersonally with borrowers, to have shorter, less restricted relationships, and to ineffectively deal with credit limitations.Small banks make riskier loans based on soft information.Policy issues are discussed, as are areas for further research. (AKP)