Small Business Credit Scoring: Evidence from Japan

Author Name HASUMI Ryo  (Japan Center for Economic Research) /HIRATA Hideaki  (Hosei University / Japan Center for Economic Research)
Creation Date/NO. June 2010 10-E-029
Research Project Study Group on Changes in Financial and Industrial Structures
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This paper studies the Japanese credit scoring market using data on 2,000 SMEs and a small business credit scoring model widely used in the market. After constructing a model for determining a bank’s profit maximization, we find the optimum loan sizes and profit levels, and point out some lending pitfalls based on small business credit scoring. We show that solving the problems of adverse selection and window dressing are the most important things to do to increase the profitability of SBCS lending. In addition, omitted variable bias and transparency of financial statements are also important.