Journal Article

Local banking development and SME conservative financing policy. Does bank branch density matter?

Vieira, Elisabete S, Sol Murta, Fátima, Gama, Paulo Miguel

2024

Overview

Does bank branch density matter for the conservative financing puzzle? This paper looks at the importance of nearby physical banking services to the decision to eschew debt among SMEs. Our multivariate logistic models rely on recent information from Portugal, a small open bank-based European economy, and control for firm-level and municipality-level effects. We show that banks' branch density at the municipality level increases the odds of local SMEs following a conservative financing policy. However, the weight of local cooperative bank branches relates negatively to the odds of not using debt. Several robustness checks concerning sampling procedures, estimation methods, and variables’ definitions corroborate our baseline results. Moreover, our results show that the effect of bank branches on the decision to eschew debt is economically more relevant for the long-term than the short-term debt.Plain English SummaryHigher bank branch density fosters the decision to avoid debt among SMEs in a given municipality. Based on multivariate logistic models and recent information from Portugal, a small open bank-based European economy, and controlling for firm-level and municipality-level effects, we show that bank branch density at the municipality level increases the odds of local SMEs following a conservative financing policy, an effect that is most pronounced for long-term debt. Several robustness checks confirm our baseline results. We highlight two main implications of our study. First, SMEs should not ignore the potential benefits of using debt taking for granted the greater availability of credit suggested by the higher density of bank branches. Second, in the current context of increased digitalization of the financial services market, firms should recognize banks’ digital information channels as a feature of the business environment, so as not to be ignored in the credit market.

• Publisher: Springer Nature B.V
• Subject: Banking / Banking industry / Banks / Bond markets / Branch banking / Cities / Cooperation / Corporate debt / Credit / Debt / Decisions / Density / Economic development / Financial management / Financial services / Financing / Information / Local businesses / Long term / Long term debt / Markets / Municipalities / Plain language / Robustness / Sampling / Short term debt / Small & medium sized enterprises-SME