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Small Business Economics

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27.04.2018

Bank market power and the intensity of borrower discouragement: analysis of SMEs across developed and developing European countries

verfasst von: Ana Mol-Gómez-Vázquez, Ginés Hernández-Cánovas, Johanna Koëter-Kant

Erschienen in: Small Business Economics | Ausgabe 1/2019

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Abstract

This paper analyzes the effect of bank market power on the financial constraints of small and medium-sized enterprises (SMEs) through the study of borrower discouragement. We use a cross-country sample of 2582 firms in 25 developed and developing European countries. Our results show that the intensity of borrower discouragement decreases with the level of bank market power, and this result is robust to the use of concentration and industrial organization measures of competition. When our model allows for non-monotonic effects, we show that more bank market power might increase borrower discouragement for firms operating in less developed economies and in countries with a high degree of bank market power. These results explain the conflicting evidence provided in previous literature concerning countries with different levels of economic development and bank market power. Our paper sets limits to the continuous concentration process in the European banking market, which may result in more discouraged and financially restricted SMEs.

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Firms in Leon (2015) can be considered small, as they have fewer than 60 employees, on average.

Evidence provided by Ryan et al. (2014) for a sample that combines SMEs operating in developed and developing European countries suggests that bank market power exacerbates SME financing constraints. However, they do not allow for heterogeneous effects across institutional environments.

In the same line, Hainz (2003) shows that the demand for collateral (as a way to extract rents) increases with the market power of banks in transition economies such as Romania and Estonia.

In the interest of brevity, the industry dummies are not shown in the tables and their results are not discussed.

The period under study in this paper is limited by data availability. However, we do believe that analyzing borrower discouragement just before the beginning of the financial crisis is important, because future contributions could use our results to compare its determining factors before, during and after the financial crisis.

We use the Poisson count model instead of the alternative negative binominal regression because we cannot reject the hypothesis that the dispersion parameter is equal to zero. Therefore, our data is over-dispersed, validating our decision to use a Poisson count model instead of a negative binomial count model (Cameron and Trivedi 1990). In addition, since our dependent variable discouraged cannot take the value zero, we use a zero-truncated Poisson count model which analyzes models that are left truncated on any value, not just zero.

The survey was carried out at the end of 2005 and the beginning of 2006, and it gathers information about borrower discouragement in the recent past, but without establishing a specific period. Therefore, we choose to measure the bank market power and the institutional environment variables in 2003, rather than in 2004. Collecting these country variables from this time is a conservative decision that we undertake to avoid reverse causality (or simultaneity). When we check the robustness of our results by measuring the bank market power and institutional environment variables in 2004, we find that our results remain qualitatively the same.

We run two robustness checks of our results. First, we use an alternative measure of banking concentration obtained from the World Bank. Following Beck et al. (2004) and Leon (2015), we use the fraction of assets held by the three largest commercial banks in a country in 2003. The results remain qualitatively the same after using this alternative concentration measure of bank market power. Second, we estimate quantile regressions for count data in order to identify varying relationships at different parts of the distribution of the dependent variable. Results, available upon request, show that the effect of our bank market power variables remains negative across the 90th and 10th quantiles of borrower discouragement intensity. Therefore, we can discard the possibility that our bank market power variables have a positive effect at one part of the distribution of the dependent variable and a negative effect at the other extreme.

In the HHI model, the reduction in the intensity of borrower discouragement as concentration increases is limited to high and upper-middle-income countries, while in the CR5 model, only firms in high-income countries benefit from increased bank market power. Countries are categorized according to the 2003 GDP per capita and are then divided into four groups, according to quartiles: low income ($9343 or less): Czech Republic, Hungary, Estonia, Slovak Republic, Poland, Lithuania, and Latvia; lower-middle income ($9344–$26,172): Spain, Cyprus, Greece, Portugal, Slovenia, and Malta; upper-middle income ($26,173–$31,134): UK, Belgium, Germany, France, and Italy; and high income ($31,135 or more): Luxembourg, Ireland, Denmark, Sweden, The Netherlands, Finland, and Austria.

Due to the strong correlation between the variables Bonds and GDP per capita, and the core importance of the later in our analyses, we check the robustness of our results by dropping the variable Bonds in Tables 6 and 7. The results remain qualitatively the same, indicating that there is not a collinearity problem in our regressions.

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Titel: Bank market power and the intensity of borrower discouragement: analysis of SMEs across developed and developing European countries
verfasst von: Ana Mol-Gómez-Vázquez
Ginés Hernández-Cánovas
Johanna Koëter-Kant
Publikationsdatum: 27.04.2018
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 1/2019
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-018-0056-y

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