SME’s main bank choice and organizational structure: Evidence from France Hiba EL HAJJ CHEHADE and Ludovic VIGNERON GERME – ESA UNIVERSITY OF LILLE 2 France NTU International Conference on Finance- December 2006

2006 NTU International conference on finance2 H. EL HAJJ CHEHADE and L. VIGNERON Question Do SMEs choose their main bank according to its organizationnal structure?

2006 NTU International conference on finance3 H. EL HAJJ CHEHADE and L. VIGNERON Related literature Distinction between relationship and transactional lending depends on the type of information produced and used in each one:  SOFT info VS HARD info. (Stein (2002), Berger, Klapper et Udell (2001),etc.) This is related to the bank’s organizational structure:  hierarchical VS decentralized (Stein, 2002)

2006 NTU International conference on finance4 H. EL HAJJ CHEHADE and L. VIGNERON Related literature (continued) Empirical results  Positive relationship between bank’s size and its customer’s size (Berger et Udell (1996), Strahan et Weston (1996), etc.).  Hierarchical banks are less likely to provide relationship financing and thus to finance opaque firms. (Berger, Klapper et Udell (2001)).  SMEs dealing with large banks are more likely to be rationed (Berger, Miller, Petersen, Rajan and Stein (2002))

2006 NTU International conference on finance5 H. EL HAJJ CHEHADE and L. VIGNERON Hypotheses 2 hypotheses to be tested  H1 : The probability that a firm chooses a decentralized main bank increases with its informational opacity.  H2 : The opaque firms that have hierarchical main banks are more likely to be credit constrained than those who have decentralized banks.

2006 NTU International conference on finance6 H. EL HAJJ CHEHADE and L. VIGNERON DATA From DIANE, a sample of SME working with 182 different banks. The sample SMEs are less than 5 years old. This data is completed by banks characteristics extracted from Bankscope

2006 NTU International conference on finance7 H. EL HAJJ CHEHADE and L. VIGNERON Dependent Variables The decentralization of the main bank is estimated by 3 different measures:  Bank’s size measured by the logarithm of total assets.  A dummy equal to 1 if the bank has a decentralized structure.  The Ratio personnel expenses over total assets.

2006 NTU International conference on finance8 H. EL HAJJ CHEHADE and L. VIGNERON Summary of our empirical model The choice between a decentralized and a centralized bank Bank’s size Dummy «decentralized » Ratio: personnel expenses over total assets Other explicative factors or control variables Financial risk Specialization of banks Market Rationing Taxes over total debt Informational opacity Firm’s size SA « Share company» (accounts certification)

2006 NTU International conference on finance9 H. EL HAJJ CHEHADE and L. VIGNERON Estimations Model 1: OLS Model 2: Logit Model 3: OLS

2006 NTU International conference on finance10 H. EL HAJJ CHEHADE and L. VIGNERON Main Results Regressions on the full sample Informational tranparency - Firm’s size - SA > 0 and significant 0,463*** 0,129* < 0 and significant -0,644*** -0,320*** < 0 and significant -0,000127*** Rationing> 0 and significant 0,647*** < 0 and significant -0,583*** < 0 and significant -0,000163*** Financial risk (Score) No significant effect >0 and significant 0,007*** No significant effect Bank’s sector specialisation < 0 and significant for: Manufacturing and Trade >0 and significant for: Manufacturing, Services and Trade >0 and significant for: Manufacturing and Services Bank’s sizeDummy DecentPersonnel expenses / TA

2006 NTU International conference on finance11 H. EL HAJJ CHEHADE and L. VIGNERON Regressions run on the sub-samples : SA and non SA  Rationing Non significant for transparent firms (SA) Significant coefficient for the opaque firms (non SA)  For the rest of variables, the results are the same as previous ones. Main Results (continued) Regressions without « firm’s size »  For Market dummy: the coefficient becomes significant.

2006 NTU International conference on finance12 H. EL HAJJ CHEHADE and L. VIGNERON Conclusion Purpose of the paper: to bring explanatory elements of the choice made by a company of its main bank. The results of the different regressions support the two predictable hypotheses. They shows that:  Opaque firms choose main banks, which have an organizational structure adapted to their needs: decentralized banks that are able to provide them a relationship financing.  Opaque firms that choose to deal with hierarchical banks face rationing problems. Importance of our research problem in the context of the current financial restructurings:  What are the consequences of such restructurings on the financing of small and medium-sized firms.  Is there really a decrease in the number of the decentralized banks and thus a decline in the financing of small and medium-sized firms.

2006 NTU International conference on finance13 H. EL HAJJ CHEHADE and L. VIGNERON Dependent variable : Taxes over total debt Intercept0,864*** (58,664) Bank debt/ total debt-0,329*** (-28,937) Ln (total firm’s assets)-0,0628*** (-37,334) Manufacturing-0,0671*** (-7,433) Services0,07877*** (9,172) Trading-0,116*** (-13,134) Construction-0,0840*** (-8,248) Fisher727,213*** Adjusted R²0,411 Condition number15,635