Monitoring in small business lending: how to observe the unobservable

In this article we investigate the determining factors of bank monitoring in small business lending. Unlike previous studies that rely 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 large number of small firms from 2009 to 2012. Our main results highlight that the frequency of a bank's monitoring effort is negatively related to the firm's reputation and the strength of the bank–firm relationship, and positively related to the bank–borrower proximity and the borrower's credit risk level.