Does Distance Still Matter? The Information Revolution in Small Business Lending


  • Mitchell A. Petersen,

  • Raghuram G. Rajan

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    • Petersen is from the Kellogg Graduate School of Management at Northwestern University; Rajan is from the University of Chicago's Graduate School of Business. Petersen thanks the Banking Research Center at Northwestern University's Kellogg School of Management; Rajan was visiting M.I.T.'s Sloan School as the Fischer Black Visiting Chair during part of this research. Rajan also thanks the Center for Research in Security Prices and the Center for the Study of the Economy and the State at The University of Chicago, as well as the National Science Foundation, for additional support. The research assistance of Spencer Chen, Iris Geisler, Helene Liss, and Jan Zasowski is greatly appreciated. We also thank the contributions of seminar participants at the American Finance Association; Carnegie Mellon University; Journal of Financial Intermediation Symposium; National Bureau of Economic Research; New York University; Northwestern University; the Norwegian School of Management; the Utah Winter Finance Conference; and the Universities of Arizona, Chicago, Georgetown, Kentucky, Maryland. Missouri, North Carolina, and Oklahoma.


The distance between small firms and their lenders is increasing, and they are communicating in more impersonal ways. After documenting these systematic changes, we demonstrate they do not arise from small firms locating differently, consolidation in the banking industry, or biases in the sample. Instead, improvements in lender productivity appear to explain our findings. We also find distant firms no longer have to be the highest quality credits, indicating they have greater access to credit. The evidence indicates there has been substantial development of the financial sector, even in areas such as small business lending.