226 S. Drucker and M. Puri
than managers with more limited decision authority.Berger and Udell (1996)show that
large banks do not reduce credit to small firms whose credit worthiness can be judged
by examining hard information, such as their financial ratios. Another study byCole,
Goldberg, and White (1999)uses the National Survey of Small Business Finances to
examine the decision by banks to accept or reject credit applications by small firms.
They find that larger banks make credit allocations based on standard hard information
criteria, such as figures that can be obtained in financial statements.Mian (2004)finds
evidence consistent with foreign banks with larger distance between their head offices
and local branches avoiding informationally difficult credit, where soft information is
likely to be more important. Also,Berger et al. (2005)use a sample of small business
loans and find that firms with financial records borrow from banks that are larger, on
average.
7.5. Bank-based vs. market-based economies
Many economies are largely bank-dependent and capital markets are not well devel-
oped. Are banks and stock markets substitutes? This remains an important question.
There has been some theoretical work on this subject.Allen (1993)andAllen and Gale
(1999)argue that banks and stock markets fundamentally differ in the way that they
process information, in that banks are inherently more conservative. Thus, stock market
based economies are more likely to embrace new technologies. In contrast,Dow and
Gorton (1997)argue that banks and stock markets are alternative institutions for the
savings/investment process. There is now growing empirical research on bank based
and stock market based systems.^39 The bulk of evidence seems to suggest that both fi-
nancial intermediaries and markets matter for growth. However, the results are far from
conclusive and more research is needed.
- Concluding remarks
There has been a large amount of research on the implications of allowing banks to
expand their activities beyond traditional lending into underwriting. There is convinc-
ing evidence that, at least in the United States, commercial banks do not suffer from
conflicts of interest and can be net certifiers of firm value when underwriting public
securities. This is seen through the ex ante pricing and ex post performance of commer-
cial bank-underwritten securities. The results are robust across different time periods,
different securities, and the use of different empirical methodology. The international
evidence on conflicts of interest from commercial bank underwriting is mixed. However,
the discrepancies may be partially explained by the varying regulatory environments
and quality of the financial markets in these countries. Future research will benefit from
empirical tests that explicitly account for these differences.
(^39) SeeLevine (2004)for an excellent review.