Does Geographical Proximity Matter in Small Business Lending? Evidence from Changes in Main Bank Relationships

We examine the causal link between the geographical distance between firms and their main bank and the termination of main bank relationships, using the exogenous change in firm-main bank distances brought about by bank branch consolidations in Japan. Our findings are threefold. First, an increase in lending distance increases the likelihood that firms switch their main bank. Second, the average lending distance for firms that switched to a new main bank decreased after the switch. Third, the lending distance of new firm-main bank relationships after the switch had a positive impact on the probability of default of small firms.