Small- and medium-sized enterprises (SMEs) are informationally opaque and bank dependent. In SME lending, banks largely rely on soft information, because the scale and scope of hard information are limited. We analyze whether and how hard and soft information affects the borrower's bargaining power vis-à-vis its bank. We use the fact that, for a given credit rating, certain borrowers obtain better loan terms than others to define measures of relative bargaining power. Using SME loan data from the USA and Germany, we find that more favorable soft information (management skills and character) increases borrower bargaining power. We also show that more favorable soft than hard information improves borrower bargaining power. The results are not driven by manipulation or statistical limitations of the credit ratings. Our study suggests that soft information represents an important and direct determinant of borrower bargaining power, affecting the outcomes of the loan contracting process.

Bargaining power, Credit ratings, Hard and soft information, Loan terms, SME lending
Banks; Other Depository Institutions; Mortgages (jel G21), Production, Pricing, and Market Structure; Size Distribution of Firms (jel L11), New Firms; Startups (jel M13),
ERIM Top-Core Articles
Small Business Economics: an entrepreneurship journal
Erasmus Research Institute of Management

Grunert, J, & Norden, L. (2012). Bargaining power and information in SME lending. Small Business Economics: an entrepreneurship journal, 39(2), 401–417. doi:10.1007/s11187-010-9311-6