HCBE Theses and Dissertations

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Date of Award

2009

Document Type

Dissertation - NSU Access Only

Degree Name

Doctor of Business Administration (DBA)

Department

H. Wayne Huizenga School of Business and Entrepreneurship

Advisor

Walter J Reinhart

Committee Member

Pan G Yatrakis

Committee Member

Paul Dion

Abstract

Moral hazard lending at the Certified Development Company (CDC) level involves the origination or authorization of loans to businesses in riskier industries through risk free funds provided by the sale of SBA agency debentures. This study analyzes the performance and lending behavior of CDCs between 2001 and 2007 to determine if they engaged in moral hazard lending. Of particular interest is the determination of changes in lending behavior after competitive restrictions on CDCs were eliminated on November 11, 2003 (SBA's fiscal year 2004), and a comparison of lending behaviors between the different sizes of CDCs. It should be noted that there is no existing literature on this subject, and this paper begins the debate on the market structure of the CDC industry. Because of this fact, banking literature that explores moral hazard lending was used to develop justification and guidelines for the empirical research. This study analyzes loan losses by NAICS industry code to determine which industry sectors pose the greatest risk and then compares these results to the existing and proposed loan portfolios of CDCs to determine if certain groups of CDCs engage in riskier lending practices. Based on management reports provided by the SBA for the operations of CDCs at five different size levels (tiers), and data on loan authorizations for proposed future loans, the results indicate a significant difference in lending behavior that can be attributed to the size of the CDC. Smaller CDCs have a significantly higher proportion of loans to industry sectors with historically higher loan losses. Moreover, these smaller CDCs have higher actual losses and loan delinquencies, and their future loan portfolios as determined by new loan authorizations are skewed toward businesses in riskier industry sectors. As such, this study finds that smaller CDCs are engaging in moral hazard lending. While the study did not reveal a change in lending behavior after competitive restrictions on CDCs were eliminated in 2004, future results may change when data from additional years is obtained and analyzed.

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