Small Business and the Value of Community Financial Institutions

This paper examines whether community banks have a niche in the production of soft information for their small business customers and if small firms value the banks ’ investment in this information. A composite measure of soft information production is created based on owner ratings of bank performance characteristics using survey data from over 1,400 small firms. This composite measure is related to the size of the owner’s primary bank, a measure of the intensity of market competition, proxies for the strength of banking relationships, and the owner’s willingness to pay for the production of soft information. These ratings are found to be significantly higher if the owner currently banks at a CFI and has stronger banking relationships, but significantly lower if the presence of more market competition. No conclusive evidence is found regarding owner’s willingness to pay for soft information production, which suggests that the higher quality soft information produced by community banks is not valued highly by small firms. Telephone: 215.204.7605 Fax: 215.204.1697 E-mail: [email protected]