This article examines the role of relationship lending in small firm finance. It examines price and nonprice terms of bank lines of credit extended to small firms. The focus on bank lines of credit allows the examination of a type of loan contract in which the bank-borrower relationship is likely to be an important mechanism for solving the asymmetric information problems associated with financing small enterprises. The authors find that borrowers with longer banking relationships pay lower interest rates and are less likely to pledge collateral. These results are consistent with theoretical arguments that relationship lending generates valuable information about borrower quality. Copyright 1995 by University of Chicago Press.

/pdf/relationship-lending-and-lines-of-credit-in-small-firm-1kzxouls91.pdf

Relationship Lending and Lines of Credit in Small Firm Finance

This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small business finance, and how capital structure varies with firm size and age. The interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment. We also analyze a number of research and policy issues, review the literature, and suggest topics for future research.

/pdf/the-economics-of-small-business-finance-the-roles-of-private-3udpq27n5a.pdf

The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle

Analytic hierarchy process : An overview of applications

In this paper the authors review the developments of the analytic hierarchy process (AHP) since its inception. The focus of this paper is a neutral review on the methodological developments rather than reporting its applications that have appeared since its introduction. In particular, we discuss problem modelling, pair-wise comparisons, judgement scales, derivation methods, consistency indices, incomplete matrix, synthesis of the weights, sensitivity analysis and group decisions. All have been important areas of research in AHP.

https://pure.port.ac.uk/ws/files/94447/AHP_review_Preprint.pdf

Review of the main developments in the analytic hierarchy process

Most commercial loans are made on a secured basis, yet little is known about the relationship between collateral and credit risk. Several theoretical studies find that when borrowers have private information about risk, the lowest-risk borrowers tend to pledge collateral. In contrast, conventional wisdom holds that when risk is observable, the highest-risk borrowers tend to pledge collateral. An additional issue is whether secured loans (as opposed to secured borrowers) tend to be safer or riskier than unsecured loans. Empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers, riskier loans and riskier banks.

Collateral, loan quality, and bank risk

This paper applies some recent advances in corporate capital structure theory to the determination of optimal capital in banking. The effects of corporate and personal taxes, government regulation, the technology of producing deposit services and the costs of bankruptcy and agency problems are all discussed in the context of the U.S. commercial banking system. The analysis suggests explanations for why commercial banks tend to have relatively less capital than nonfinancial firms, why commercial bank leverage has tended to increase over time and why large banks tend to have relatively less capital than small banks.

/pdf/implications-of-corporate-capital-structure-theory-for-2gi0lb4xjz.pdf

Implications of Corporate Capital Structure Theory for Banking Institutions

A lack of synchronization between cash inflows and outflows presents the problem of investing positive net flows and financing negative net flows. In addition to the basic investment-financing issue there are other interrelated problems such as the payment schedule and the minimal cash balance that directly affect cash management decisions. Previous attempts to solve these problems have imposed constraints that limit their application. The purpose of this study is to develop an applicable method for solving the cash management problem by deriving a linear programming model that is divided into unequal periods. The unequal time division maintains the day-to-day aspect of the problem while reducing the number of periods and variables to a manageable size. Decision variables are divided into four groups: the payment schedule, securities transactions, short-term financing, and the cash balance. The model determines the optimal values of these variables subject to institutional constraints and within a framewo...

An Unequal-Period Model for Cash Management Decisions

The purpose of this paper is to present an integrated model of accounts receivable. The model incorporates the major components of credit and collection policies such as the cash discount, credit period and charges for late payments. It considers the investment in accounts receivable, losses from bad debts and the impact of credit terms on sales. The objective is to maximize the present value of net earnings from accounts receivable. After deriving the general model, a simplified version is solved by classical optimization techniques under various sets of assumptions that are gradually relaxed.

An Integrated Model for Accounts Receivable Management

Most banking institutions offer a variety of services. Therefore, like any other multiple-product firm, the output mix issue is central for bank management decision making. A necessary condition for the optimization of outputs and inputs is the knowledge of the production function. In the case of banking, the solution to this problem is more complicated than in the general case due to conceptual and practical difficulties in defining and measuring outputs. The interdependence between the issues of optimal output mix and output measures has not received much attention in the banking literature. Positive studies in this area have concentrated on the problem of economies of scale while normative studies have dealt mainly with optimal output mix. In this paper an attempt is made to deal with both issues within the context of a multiple-product firm production function. Interdependence in bank output decisions can result either from the demand or the cost function or from both. In this paper the discussion centers on one possible source of interdependence on the cost side, namely, jointness in the production function of banks. Other sources of interdependence, e.g., jointness in the demand for bank services, also exist in reality. The model offered here permits a separation of other sources of interdependence from the main discussion. It was felt that such a separation is desirable for expository reasons. Section 2 of this paper presents a brief survey of the relevant literature on the subject. In section 3, a restrictive model of the environment within which banks operate is specified, and different types of bank cost functions are examined. The issue of jointness in decision making is raised in section 4. An analytical test for the

Output Mix and Jointness in Production In the Banking Firm

Cost analysis for branching systems: methodology, test results, and implications for management

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