SME’s main bank choice and organizational structure: Evidence from France

1. SME’s main bank choice and organizational structure: Evidence from France Hiba EL HAJJ CHEHADE and Ludovic VIGNERON GERME – ESA UNIVERSITY OF LILLE 2 France NTU International Conference on Finance- December 2006

2. Question • Do SMEs choose their main bank according to its organizationnal structure? 2006 NTU International conference on finance

3. Related literature • Distinction between relationship and transactional lending depends on the type of information produced and used in each one: • SOFT info VS HARD info. (Stein (2002), Berger, Klapper et Udell (2001),etc.) • This is related to the bank’s organizational structure: • hierarchical VS decentralized (Stein, 2002) 2006 NTU International conference on finance

4. Related literature (continued) • Empirical results • Positive relationship between bank’s size and its customer’s size (Berger et Udell (1996), Strahan et Weston (1996), etc.). • Hierarchical banks are less likely to provide relationship financing and thus to finance opaque firms. (Berger, Klapper et Udell (2001)). • SMEs dealing with large banks are more likely to be rationed(Berger, Miller, Petersen, Rajan and Stein (2002)) 2006 NTU International conference on finance

5. Hypotheses • 2 hypotheses to be tested • H1 : The probability that a firm chooses a decentralized main bank increases with its informational opacity. • H2 : The opaque firms that have hierarchical main banks are more likely to be credit constrained than those who have decentralized banks . 2006 NTU International conference on finance

6. DATA • From DIANE, a sample of 6 258 SME working with 182 different banks. • The sample SMEs are less than 5 years old. • This data is completed by banks characteristics extracted from Bankscope 2006 NTU International conference on finance

7. Dependent Variables • The decentralization of the main bank is estimated by 3 different measures: • Bank’s size measured by the logarithm of total assets. • A dummy equal to 1 if the bank has a decentralized structure. • The Ratio personnel expenses over total assets. 2006 NTU International conference on finance

8. Summary of our empirical model 2006 NTU International conference on finance

9. Estimations • Model 1: OLS • Model 2: Logit • Model 3: OLS 2006 NTU International conference on finance

10. Main Results • Regressions on the full sample 2006 NTU International conference on finance

11. Main Results (continued) • Regressions run on the sub-samples : SA and non SA • Rationing • Non significant for transparent firms (SA) • Significant coefficient for the opaque firms (non SA) • For the rest of variables, the results are the same as previous ones. • Regressions without « firm’s size » • For Market dummy: the coefficient becomes significant. 2006 NTU International conference on finance

12. Conclusion • Purpose of the paper: to bring explanatory elements of the choice made by a company of its main bank. • The results of the different regressions support the two predictable hypotheses. They shows that: • Opaque firms choose main banks, which have an organizational structure adapted to their needs: decentralized banks that are able to provide them a relationship financing. • Opaque firms that choose to deal with hierarchical banks face rationing problems. • Importance of our research problem in the context of the current financial restructurings: • What are the consequences of such restructurings on the financing of small and medium-sized firms. • Is there really a decrease in the number of the decentralized banks and thus a decline in the financing of small and medium-sized firms. 2006 NTU International conference on finance

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