Banking proximity and firm performance. The role of small businesses, community banks and the credit cycle

This paper analyses the link between banking geography and firm performance, i.e., whether the proximity within banks and between banks and borrowers has a positive impact on firms’ Returns on Assets (ROA). Using a unique dataset of Italian manufacturing firms and banks from 2006 to 2011 and an instrumental variable approach to account for endogeneity, we investigate whether this effect increases with the presence of community banks and small businesses and whether the relationship changes over the credit boom and bust, which preceded and followed the Lehman Brothers collapse. We show that geographical proximity matters for firm performance especially when the presence of community banks is high and when considering small (micro) firms. During the credit boom, both functional distance and operational proximity seem to matter, whereas, during the credit crunch, operational proximity has a more relevant role compared to functional distance in becoming an important driver to increase firm’s performance.