Does the quality of lender-borrower relationships affect small business access to debt? Evidence from Canada and implications in China

- Quality of lender-borrower relationship does not affect small firms' debt access.
- Quality of lender-borrower relationship does not affect changes in borrowing terms.
- Similar supporting evidence is found in the GUANXI-society of China.
- Findings have regional effects in both mature and emerging economies.

The literature on corporate governance and entrepreneurial finance suggests that when lender-borrower relationships are of longer duration, they tend to be more successful in solving the informational asymmetry problems related to small business debt financing. Using the data from Canadian financial markets, this study first confirms this finding, insofar as the quality of lender-borrower relations is affected by traditional solutions to agency conflicts, lender requirements, and negative changes in the borrowing terms offered by lenders. However, in testing this conclusion further, we empirically demonstrate that, counter-intuitively, the quality of the lender-borrower relationship does not affect a small firm's access to debt, or change the terms of borrowing. We also show similar supporting evidence from lenders to small firms in China, where business relationships involving “guanxi” (or connections that are beneficial for both parties) are commonly expected to influence access to debt. The robustness of the study's results is shown by the data from numerous lending institutions in a province of China.