Research on Entrepreneurial Finance: How to Use the Surveys of Small Business Finances Rebel A. Cole Departments of Finance and Real Estate DePaul University 2010 Annual Meetings of the Financial Management Association October 21st, 2010

What is the SSBF? Series of four nationally representative surveys of U.S. small businesses. Series of four nationally representative surveys of U.S. small businesses. Small business: nonfarm, nonfinancial firm with fewer than 500 employees. Small business: nonfarm, nonfinancial firm with fewer than 500 employees. Cross-sectional snapshots as of 1987, 1993, 1998, 2003 Cross-sectional snapshots as of 1987, 1993, 1998, 2003 Not exclusively entrepreneurial firms, but covers both entrepreneurial and non- entrepreneurial firms. Not exclusively entrepreneurial firms, but covers both entrepreneurial and non- entrepreneurial firms. Cole (2010) Bank Credit, Trade Credit or No Credit

What is the SSBF? By looking at younger, faster growing firms, you can segment the survey into entrepreneurial and non-entrepreneurial groups. By looking at younger, faster growing firms, you can segment the survey into entrepreneurial and non-entrepreneurial groups. Broadly representative of about 5 million predominantly privately held firms in each year. Broadly representative of about 5 million predominantly privately held firms in each year. Very small number of publicly traded firms that can easily be excluded from the sample to target “privately held firms.” Very small number of publicly traded firms that can easily be excluded from the sample to target “privately held firms.” Cole (2010) Bank Credit, Trade Credit or No Credit

What is in the SSBFs? Data. LOTS of data. Data. LOTS of data. Thousands of variables. Thousands of variables. Major Sections: Major Sections: Governance/OwnershipGovernance/Ownership Inventory of Financial ServicesInventory of Financial Services Most Recent Loan ApplicationMost Recent Loan Application Trade CreditTrade Credit Balance Sheet and Income StatementBalance Sheet and Income Statement Credit history of firm and ownerCredit history of firm and owner Cole (2010) Using SSBFs for Research

What is in the SSBFs? 1987: 3,404 obs. / 3.2 million 1987: 3,404 obs. / 3.2 million 1993: 4,637 obs. / 4.9 million 1993: 4,637 obs. / 4.9 million 1998: 3,561 obs. / 5.1 million 1998: 3,561 obs. / 5.1 million 2003: 4,240 obs. / 6.0 million 2003: 4,240 obs. / 6.0 million Cole (2010) Using SSBFs for Research

What is a sampling weight? Stratified random samples Stratified random samples Stratified onStratified on Firm size: 0-19, 20-49, 50-99, Firm size: 0-19, 20-49, 50-99, Urban/Rural Urban/Rural 9 census regions 9 census regions Total of 72 sampling strata in 2003Total of 72 sampling strata in 2003 Each firm is associated with a sampling weight. Each firm is associated with a sampling weight. It is important to use the sampling weights in your analysis. It is important to use the sampling weights in your analysis. Cole (2010) Bank Credit, Trade Credit or No Credit

What is a sampling weight? Sampling weight = inverse of selection probability. Sampling weight = inverse of selection probability. 1 out of 100 = 100 weight 1 out of 100 = 100 weight 1 out of 1,000 = 1,000 weight 1 out of 1,000 = 1,000 weight In other words, how many firms in the sampling frame does a particular sampled firm represent? In other words, how many firms in the sampling frame does a particular sampled firm represent? Large firm oversampled: 100 weight Large firm oversampled: 100 weight Small firm not oversampled: 1,000 weight Small firm not oversampled: 1,000 weight Cole (2010) Bank Credit, Trade Credit or No Credit

What is imputation? Imputation is the process of filling in missing information. Imputation is the process of filling in missing information. Each firm is asked to answer all of the survey questions, but some cannot or will not answer certain questions. Each firm is asked to answer all of the survey questions, but some cannot or will not answer certain questions. Without imputation, you would lose most of your observations in multiple regression. Without imputation, you would lose most of your observations in multiple regression. Each variable has a shadow variable indicating whether the value is reported or imputed. Each variable has a shadow variable indicating whether the value is reported or imputed. Cole (2010) Bank Credit, Trade Credit or No Credit

What is multiple imputation? 2003 SSBF is a multiply imputed survey that provides 5 implicates SSBF is a multiply imputed survey that provides 5 implicates. Each implicate is identical for questions answered by respondents. Each implicate is identical for questions answered by respondents. Each implicate is slightly different for questions not answered by respondents. Each implicate is slightly different for questions not answered by respondents. This enables you to adjust for the variability introduced by the imputation process. This enables you to adjust for the variability introduced by the imputation process. Cole (2010) Bank Credit, Trade Credit or No Credit

What is multiple imputation? In the 2003 SSBF, only about 1% of the responses were imputed so, for most variables, this is a non-issue. In the 2003 SSBF, only about 1% of the responses were imputed so, for most variables, this is a non-issue. You can test the robustness of your results by rerunning your analysis with each of the five implicates to see if anything really changes. You can test the robustness of your results by rerunning your analysis with each of the five implicates to see if anything really changes. If so, you might want to use survey procedures that adjust for this problem. If so, you might want to use survey procedures that adjust for this problem. Cole (2010) Bank Credit, Trade Credit or No Credit

What is multiple imputation? DON’T run your analysis using all 21,200 observations in your analysis unless you are using MI software. DON’T run your analysis using all 21,200 observations in your analysis unless you are using MI software. There are only 4,240 firm observations. There are only 4,240 firm observations. DO use only one of the five implicates. DO use only one of the five implicates. DO test for robustness by rerunning your analysis using each implicate. DO test for robustness by rerunning your analysis using each implicate. Cole (2010) Bank Credit, Trade Credit or No Credit

What about the earlier SSBF? Unfortunately, there is only one implicate for the 1987, 1993 and 1998 SSBFs. Unfortunately, there is only one implicate for the 1987, 1993 and 1998 SSBFs. And there percentage of values that were imputed is much higher than for And there percentage of values that were imputed is much higher than for Not much can be done about this problem. Not much can be done about this problem. Cole (2010) Bank Credit, Trade Credit or No Credit

Can I pool the four SSBF? Sure, you can, but I have no idea how to interpret your results if you do. Sure, you can, but I have no idea how to interpret your results if you do. Samples are not independent. If you use the sampling weights, you are double- counting much of the sampling frame. Samples are not independent. If you use the sampling weights, you are double- counting much of the sampling frame. The 5 million firms in the 2003 frame are largely the same as the 5 million firms in the 1998 sampling frame, except for births or deaths. The 5 million firms in the 2003 frame are largely the same as the 5 million firms in the 1998 sampling frame, except for births or deaths. Good luck adjusting the weights! Good luck adjusting the weights! Cole (2010) Bank Credit, Trade Credit or No Credit

Can I pool the four SSBFs? Also, beware nuanced changes in the variables across time. Also, beware nuanced changes in the variables across time. Example: Most Recent Loan Example: Most Recent Loan 1987, 1993: includes renewals of credit lines but these are not identified1987, 1993: includes renewals of credit lines but these are not identified 1998: excludes renewals of credit lines1998: excludes renewals of credit lines 2003: includes renewals of credit lines and IDs new lines from renewals.2003: includes renewals of credit lines and IDs new lines from renewals. Renewals are turned down at far lower rate. Renewals are turned down at far lower rate. Cole (2010) Bank Credit, Trade Credit or No Credit

Best Thing about the SSBFs They’re FREE!!! They’re FREE!!! Codebooks Codebooks Methodology Reports Methodology Reports Questionnaires, and... Questionnaires, and... DATA!!! DATA!!! Cole (2010) Using SSBFs for Research

What can you do with the SSBFs? Importance of lending relationships Importance of lending relationships Petersen and Rajan (JF 1994, QJE 1995)Petersen and Rajan (JF 1994, QJE 1995) Berger and Udell (JB 1995)Berger and Udell (JB 1995) Cole (JBF 1998)Cole (JBF 1998) Lending by large and small banks: Lending by large and small banks: Cole, Golderg and White (JFQA 2004)Cole, Golderg and White (JFQA 2004) Berger et al. (JFE 2005)Berger et al. (JFE 2005) Cole (2010) Using SSBFs for Research

What can you do with the SSBFs? Discrimination in SB credit market Discrimination in SB credit market RaceRace Cole (mimeo 1998) Cole (mimeo 1998) Cavalluzo and Cavalluzo (JMCB 1998) Cavalluzo and Cavalluzo (JMCB 1998) Cavalluzo et al. (JB 2002) Cavalluzo et al. (JB 2002) Blanchflower et al. (RESTAT 2003) Blanchflower et al. (RESTAT 2003) Blanchard, Zhou, Yinger (JUE 2008) Blanchard, Zhou, Yinger (JUE 2008) GenderGender Cole and Mehran (mimeo 2009) Cole and Mehran (mimeo 2009) Cole (2010) Using SSBFs for Research

What can you do with the SSBFs? Corporate Governance Corporate Governance Agency costs and ownership structureAgency costs and ownership structure Ang, Cole and Lin (JF 2000) Ang, Cole and Lin (JF 2000) Bitler et al. (JF 2005) Bitler et al. (JF 2005) Executive compensationExecutive compensation Cole and Mehran (mimeo 2009) Cole and Mehran (mimeo 2009) Capital Structure Capital Structure Cole (mimeo 2008)Cole (mimeo 2008) Cole (2010) Using SSBFs for Research

What can you do with the SSBFs? Trade Credit Trade Credit Rajan and Petersen (RFS 1997)Rajan and Petersen (RFS 1997) Cole (mimeo 2010)Cole (mimeo 2010) Cole (2010) Using SSBFs for Research

Question? THE END Cole (2010) Using SSBFs for Research