Monitoring in Small Business Lending : How to Observe the Unobservable

This paper investigates the determining factors of bank monitoring in small business lending. Unlike previous studies that have relied on proxies of a bank's monitoring effort, we use a large and unique data set that includes the number of monitoring contacts per year between a European bank and a sample of small firms over the 2009-2012 period. Our main results highlight that the frequency of a bank's monitoring effort is negatively related to firms' reputation and the strength of the bank-firm relationship, while it is positively related to the proximity and borrower's credit risk level