The relevance of owner-manager signals and risk proxies to the pricing of bank loans

This exploratory study, using a sample of 115 new bank loans to small owner-managed firms, demonstrates that a simple categorical pricing model can explain a substantial part of the variation in interest rate premia. It appears that loan term and size interact (in a categorical schema) in their association with interest rate premia. It is suggested that this is more likely a product of co-determination rather than causation. There appear to be significant categorical pricing effects attributable to human capital, industry, and collateral effects. The role of collateral remains ambiguous, although it appears that source matters as much as form. Although further testing of the model is warranted, the results generally indicate that a simple categorical model may be an appropriate representation of loan pricing for small firms and that this can be used to test the value to borrowers of investing in quality signals and information cues.