Verifying the State of Financing Constraints : Evidence from US Business Credit Contracts

Many policy makers are concerned that tight financing constraints for small businesses are stalling the recovery from the Great Recession. This paper empirically assesses two agency problems commonly used to motivate financing constraints - one resulting in a "firm balance sheet channel" and one resulting in a "bank balance sheet channel." Evaluating specific models of these two agency problems against a comprehensive data set of U.S. small business credit contracts, I find strong support for the rm balance sheet channel but only little support for the bank balance sheet channel. A complementary regression analysis confirms this result. Hence, to support small business lending, policies seeking to improve firms' balance sheets may be more effective than providing additional capital to banks