Three essays in applied finance

This dissertation is composed of three papers (chapters) and derives its motivation specifically from financial intermediation and small business financing. Two of the papers are based on small businesses and relationship-based lending. The third paper specifically analyzes farm households that generate income from farm operations, as a representation of small businesses, and focuses on consumption behavior of farm households. The two papers on relationship-based lending focus on the changing structure of relationship-based lending to small businesses. Both of these papers are motivated with the development of the Small Business Credit Scoring (SBCS) systems during the mid and late-1990s. With the emergence of SBCS, hard-information based lending models became more popular and the need for relationships in lending has decreased. The two papers use the Survey of Small Business Finances (SSBF) datasets from the Board of Governors of Federal Reserve System. Different from the previous literature, in both papers, the importance of relationships over different time periods is compared in a single regression by using all the available years for the SSBF dataset. The first paper analyzes whether the significance of borrower-lender relationships on loan contract terms, in particular interest rate premiums and collateral and guarantor requirements, declined. The second paper focuses on analyzing changes in effects of relationship on credit availability and credit amounts granted to small businesses. Overall, the results support the hypothesis that importance of borrower-lender relationships when lending to small businesses declined over time. The third paper on consumption specifically analyzes farm households that generate income from farm operations, as a representation of small businesses, and determines whether the life cycle / permanent income hypothesis is consistent with the consumption of farm households. This paper uses the most recent farm level data, the Farm Business Farm Management (FBFM) data for Illinois farms from 1995 to 2009, to reach more accurate conclusions about recent farm household consumption behaviors. In the literature, there has also been difficulty finding datasets with micro-data level household expenditure information. The advantage of using the FBFM data is that it is rich in farm household expenditures. The study finds evidence that current income changes are not significant in explaining consumption changes of farm households, thus confirming the life cycle / permanent income hypothesis for farm households