Studying small firms and their banks: a review of common methods and current concerns

Consideration of the constraints faced by small firms in credit markets (e.g. credit rationing, overpricing, loan scaling, and the existence of discouraged borrowers), and the relationship between their experiences and firm development, continues to figure prominently in the empirical literature. Notwithstanding the growth in alternative forms of external financing, banks remain the main source of external funds for small firms. Taking this recognition as our point of departure, this chapter reviews the evolution of the study of small firms’ access to bank credit. Our interest is in how well methods have allowed researchers to draw robust inferences and to develop a reliable evidence base. By reflecting upon the methods used, we reveal the importance of identifying the source of endogeneity, selecting the appropriate solutions, testing the suitability, and rationalising choices. The state of the art has developed considerably over the last twenty years. However, best practice is inconsistently followed.