“Does banking relationship configuration affect the risk-taking

behavior of French SMEs?”

Ludovic Vigneron Maître de Conférences

Université de Valenciennes

Ramzy Ben Kraiem Associate Professor Audentia School of

Management

AFFI Conference june 2015, Cergy Pontoise

What do we do now?

• Context and Motivation

• The Research Question

• Hypothesis

• Data

• Tests Specifications

• The Findings

• Robustness Checks

• Conclusion

Context and Motivations

• Banks/SMEs relationships

SME Bank(s) initially determined interest

capital payback

loans

Investment opportunities

choses Information

Asymmetries

choses

Context and Motivations

• Banks/SMEs relationships

SME Bank(s) initially determined interest

capital payback

loans

Information Asymmetries

Risky opportunities

Safe opportunities

Context and Motivations

• Risk taking and payoffs

=> high risk of asset substitution

Risky projects Safe projects

SME High return Medium return

Bank(s) Initially determined interest rate

Context and Motivations

• Bank(s) monitoring

– Can mitigate the risk of assets substitution problems

– But do banks always have clear incentives to monitor?

• SMEs opacity / lending technology (efficiency problems)

• Exclusivity / multibank context (free riding problems)

Context and Motivations

• Bank(s) monitoring

More efficient monitoring

Less efficient monitoring

Opaque firms

Transparent firms

Multibank Funding

(arm’s length credit)

Exclusive funding (relationship

banking)

Multibank Funding

(arm’s length credit)

Exclusive funding (relationship

banking)

Right tech No free riding

Right tech Monitoring is not the main focus

in bank risk management strategy

The Research Question

Does banking relationship configuration affect the risk-taking behavior of French SMEs?

Hypothesis

• H1: SMEs working with a decentralized main bank would be engaged in less risky projects.

• H2: SMEs working with a centralized main bank would be engaged in more risky projects.

Hypothesis

• H3: SMEs working with more banks allows the firm to take more risk. (free riding)

• H4: SMEs working with multiple banks reduces risk taking. (more eyes, better view)

Hypothesis

• H5 : SMEs engaged with a decentralized main bank take less risk when the number of secondary banks is low than when it is important. (more banks reduce relationship banking efficiency)

Data

• SMEs following UE criteria

• Diane (for the main bank) and Kompass Europe (for secondary banks)

– Final sample 1116 SMEs

– Banking relationship structures are identified in 2010

– Accounting data are observed between 2004 and 2012

Tests Specification

• Starting point :

– Choosing more risky investment opportunities has to generate more variations in firms’ future performance.

Tests Specification

• the Glejser’s test (heteroskedasticity test)

– benchmark model

– Test

𝑅𝑂𝐴𝑖,𝑡 = 𝛼 + 𝛽1𝐵𝑎𝑛𝑘𝑖𝑛𝑔 𝑅𝑒𝑙𝑎𝑡.𝑖+ 𝛽2𝑆𝑖𝑧𝑒𝑖,𝑡 + 𝛽3𝐴𝑔𝑒𝑖,𝑡 + 𝛽4𝐺𝑟𝑜𝑤𝑡ℎ 𝑂𝑝𝑝𝑜𝑟𝑡.𝑖,𝑡+ 𝛽5𝐿𝑒𝑣.𝑖,𝑡

+ 𝛽6𝐷𝑖𝑣.𝑖,𝑡+ 𝛽7𝐶𝑜𝑟𝑝. 𝐺𝑜𝑣.𝑖,𝑡+ 𝛽8𝑆𝑒𝑐𝑡𝑜𝑟𝑠𝑖 + 𝛽9𝑌𝑒𝑎𝑟𝑠𝑡 + 𝜀𝑖,𝑡 (1)

𝜀𝑖,𝑡 = 𝛼 + 𝛽1𝐵𝑎𝑛𝑘𝑖𝑛𝑔 𝑅𝑒𝑙𝑎𝑡.𝑖+ 𝛽2𝑆𝑖𝑧𝑒𝑖,𝑡 + 𝛽3𝐴𝑔𝑒𝑖,𝑡 + 𝛽4𝐺𝑟𝑜𝑤𝑡ℎ 𝑂𝑝𝑝𝑜𝑟𝑡.𝑖,𝑡+ 𝛽5𝐿𝑒𝑣.𝑖,𝑡+ 𝛽6𝐷𝑖𝑣.𝑖,𝑡

+ 𝛽7𝐶𝑜𝑟𝑝. 𝐺𝑜𝑣.𝑖,𝑡+ 𝛽8𝑆𝑒𝑐𝑡𝑜𝑟𝑠𝑖 + 𝛽9𝑌𝑒𝑎𝑟𝑠𝑡 + 𝜖𝑖,𝑡

(2)

Tests Specification

• Banking relationship configuration – Main bank organizational structure

• Decentralized = a local bank or a mutual bank

• Centralized = big bank or foreign bank

– Number of banks

– Interaction term

• Performance – ROA

– ROE

– Operating Cash-flow

Tests Specification

• Controls – Size – Age – Leverage – Capex/sales – Export – Number of sites – Family business – Female manager – Incorporated firms – Subsidiary – Time and industry fixed effects

Some elements about the sample

050

0 2 4 6 8 0 2 4 6 8

Centralized Main Bank Decentralized Main Bank

Perc

ent

Number of BanksGraphs by Decent_bank

Number of Banks and Main Bank Type

The Findings

• SMEs engaged with a decentralized main bank invest in less risky projects. (H1, H2 => Ok)

• SMEs working with more banks invest in less risky projects. (H3 => Not Ok, H4 => Ok)

• SMEs working with a decentralized main bank invest in less risky projects when they work with less than 3 banks and invest in more risky projects when they work with less than 3 banks. (H5 => Ok)

Tests ROE

(1) (2) (3) (4) (5) (6)

Constant 13.095***

(5.080)

9.404***

(3.720)

9.694***

(3.990)

9.735***

(2.650)

10.166***

(3.250)

1.131

(0.240)

Nb. of banks -1.743***

(6.250)

Decent. main

bank

-4.614***

(5.370)

-2.516***

(3.770)

-3.214***

(6.140)

3.192***

(3.960)

Nb. of banks ×

Decent. main

bank

1.637***

(4.490)

One

decentralized

bank

-0.436

(1.010)

One

centralized

bank

2.142***

(3.730)

Fisher test 31.98*** 34.97*** 36.03*** 15.24*** 27.87*** 9.83***

R2 adj. 0.196 0.193 0.192 0.215 0.208 0.219

Nb. obs. 7924 7924 8082 3586 6028 1896

Echantillon complet 1 banque

> 3 banques < 3 banques

Robustness Checks

• Standard deviation of performance metrics

– Over the period variation

• Mean of time varying controls

• Findings are the same

Robustness Checks

• Full sample

SD ROA SD ROE

SD operating cash-flows

Nb. of banks -0.380** -2.454*** ns

Decent. main bank -1.378*** -7.421*** ns

Nb. of banks × Decent.

main bank 0.343* 2.605*** ns

One decentralized bank ns ns ns

One centralized bank 0.993** 3.386** 0.918*

Robustness Checks

• subsamples

Decent. main bank SD ROA SD ROE SD operating cash-flows

One bank -1.213*** -3.853** ns

One or two banks -1.055*** -4.559*** -0.957**

More than two banks ns 3.968* ns

Conclusion

• Banking relationship configuration clearly affect SMEs risk taking behavior.

• Less risky SMEs work with more banks if they have a centralized main bank.

• SMEs engaged with a decentralized main bank are less risky unless they also work with two or more secondary banks.

Where are the riskier SMEs ?

050

0 2 4 6 8 0 2 4 6 8

Centralized Main Bank Decentralized Main Bank

Perc

ent

Number of BanksGraphs by Decent_bank

Number of Banks and Main Bank Type