Distances and Small Business Credit Constraints: The French case

Deregulation and progress in information and communication technologies have increased thegeographical expansion of banking structures and instruments. This makes banks operationallyclose to the borrowers. At the same time, banking industry consolidation have induced ageographical concentration of banking decision centers and strategic functions, leading toan increase of the functional distance that separates the decision center of a bank from itsoperational branches. The aim of this paper is to evaluate the impact of these two trends onsmall and medium-sized enterprise (SME) lending. Our findings on French data suggest that(i) increased functional distance induces an increase of the investment cash flow sensitivityconsidered as a measure of financing constraints and that (ii) the relationship betweenoperational proximity and financing constraints is non linear with an investment-cash flowrelationship supposed to be increasing for low levels of operational proximity below a certainthreshold and decreasing for high levels of it. The adverse effect of functional distance onfinancing constraints is particularly acute for small firms.