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Trustworthiness and interest rates: an empirical study of Italian SMEs

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Abstract

Trust is expected to reduce transaction costs and agency costs and thus influence the cost of credit for small businesses. Assessments of trustworthiness are based on the ability, benevolence and integrity of the owner manager. The study examines whether lending managers’ assessments of the trustworthiness of small and medium-sized enterprise (SME) owner managers are associated with the interest rate charged. Data were obtained from a survey of lending managers from small banks in North East Italy. Control variables and a vector of trustworthiness factors were collected on a random sample of customers, resulting in data for 365 small firms (74% response rate). Multivariate regression analyses provided evidence of a negative association between trustworthiness and interest rates. Banks, owner managers, policy makers and researchers should recognise the potential of trust to influence lending decisions and behaviour.

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Notes

  1. Now reduced to 51 after Cassa Raiffeisen di Rifiano went bankrupt in 2006.

  2. The variable measures bank managers’ expectations about the reduction or increase in credit to firms in the short term, i.e. over 3 months. The bank managers are asked to choose from five grades: −1, large increase in credit expected; −0.5, a small increase in credit; 0, no change; 0.5, small tightening of credit; 1, large tightening of credit. The survey is carried out quarterly at European level; in Italy it is administered by the Bank of Italy. It is a measure of expectations that is less affected by fiscal policy than the base rate.

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Acknowledgements

The authors are extremely grateful to two anonymous referees and the associate editor, Julie Ann Elston, who provided very constructive guidance that helped to improve this paper considerably.

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Authors and Affiliations

  1. Lancaster University Management School, Lancaster, Lancashire, LA1 4YX, UK

    Carole Howorth

  2. The Open University Business School, Milton Keynes, Buckinghamshire, MK7 6AA, UK

    Andrea Moro

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  1. Carole Howorth
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Correspondence to Carole Howorth.

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Howorth, C., Moro, A. Trustworthiness and interest rates: an empirical study of Italian SMEs. Small Bus Econ 39, 161–177 (2012). https://doi.org/10.1007/s11187-010-9285-4

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