bank dimension trust

TRUSTS MULTI-DIMENSIONAL FORM AND ROLE IN BANK-SMALL FIRM RELATIONSHIPS

Patrick Saparito Whittemore School of Business and Economics

University of New Hampshire 15 College Road, McConnell Hall

Durham, NH 03824 (603) 862-3348

[email protected]

Chao Chen New York University, Stern Business School

KMC Building 7-64 44 West 4th Street

New York, NY 10012 (212) 998-0421

[email protected]

The authors gratefully acknowledge the Kauffman Foundation for financially sponsoring this research and thank both Dr. Roy Lewicki and Dr. Harry Sapienza for their thoughtful comments.

Trusts Multi-Dimensional Form and Role, Page 1

TRUSTS MULTI-DIMENSIONAL FORM AND ROLE IN BANK-SMALL FIRM RELATIONSHIPS

Abstract (168 words)

We examine trust's multi-dimensional form and role in bank-small firm relationships. In

doing so, we employ the trust typology developed by Lewicki & Bunker (1996) that includes:

calculus-based trust, knowledge-based trust, and identification-based trust. We draw

connections between previous agency and sociological discussions on bank-small firm

relationships and highlight the parallels between these approaches and the trust perspective

employed here.

We explore how banking practices influence each dimension of a customer's trust in their

bank and how this trust is associated with a small business's customer satisfaction. The

theoretical framework is empirically tested using data collected from a matched sample of 867

small business executives and bank managers that had direct responsibility for these accounts.

The results suggest that the three trust dimensions exist at the inter-organizational level within

bank-small business relationships. Further, we found that a relational banking strategy and

management continuity differentially affected the trust dimensions. The three trust dimensions

in turn displayed different effect sizes on customer satisfaction. Finally, we present implications

for future research and practice.

Keywords: Small business finance, Banking, Trust


INTRODUCTION

Although small and new ventures play an important role in US economic growth, there is

a long-standing notion that small firm size may hinder access to capital markets (Petersen &

Rajan, 1994). Access to resources is essential to small firm growth, and resource barriers may

attenuate these companies success (Churchill & Lewis, 1983). This is particularly true of

financial resources (Berger & Udell, 1998).

Trust has surfaced as an important variable between investors and the small firms in

which they invest (Cable & Shane, 1997; Sapienza & Koorsgaard, 1996). However, nearly all

attention has focused on trusts role in equity investor-small firm relationships. This is the case

despite the fact that the vast majority of small businesses never access venture or angel equity

capital and instead rely heavily on commercial banks for outside funding (Berger & Udell,

1998). Therefore, we feel the study of trusts role in bank-small firm can begin to fill a gap in

the management literature and have import for the small business sectors health and well being.

Financial theorists predominately conceptualize lender-borrower relationships from a

principal-agent perspective (e.g., Jensen & Meckling, 1976; Peterson & Rajan, 1994). A principal-

agent relationship exists when one party (the principal) authorizes another party (the agent) to act on

his or her behalf and the principals welfare can be affected by the agents actions (Arrow, 1985).

However, as an undersocialized view of economic exchange (Donaldson, 1990; Perrow, 1981),

agency theory research does relatively little to explore the social-psychological factors that

pervade inter-firm relationships. Additionally, agency theory inherently focuses on the problems

of investors (Perrow, 1981) creating a unidirectional, hierarchical relationship where bank

investors seek to control investees behaviors (Amit, Glosten & Muller, 1990; Cable & Shane,

1997). This is the case despite assertions by bankers that bank-firm relationships are an


important means to expanding bank-firm interaction across multiple products (e.g., deposit

accounts, investment advisory, etc.) in which the firm is principal and the bank is agent.

Alternatively, the management literature suggests that the complex nature of inter-

organizational relationships arises from the social-psychological factors involved in the

interaction (Ring & Van de Ven, 1994). Over time business individuals learn about one

anothers preferences, develop special understandings which allows cooperation between

organizations to unfold (Browning, Beyer & Shelter, 1995; Doz, 1996). Further, sociologists

argue that social relationships play an important role in the way bank-firm transactions are

governed, the degree of access to debt, and cost of capital (Uzzi, 1999; Zucker, 1986).

We examine bank-small firm relationships from a multi-dimensional trust perspective for

two main reasons. First, most studies measure the nature of bank-firm relationships through

examining the relationships duration, or breadth across products (e.g., Petersen & Rajan, 1994;

Uzzi, 1999). However, a trust perspective allows an explicit examination of these relationships

social-psychological aspects. Second, a trust perspective shed lights on principal-agent

conceptualizations (Shapiro, 1987) as well as the small but growing social network approaches to

bank-small firm relationships (e.g., Uzzi, 1999, Uzzi & Gillespie, 1999).

This paper will take a similar approach to that taken by the majority of the venture

capital-small firm research, which is to approach the issue investor-investee relationships from

the supply side perspective of the venture capitalist (in our case the bank) and explore how that

influences outcomes for the small business (Mason & Harrison, 1999). To accomplish this, we

first introduce the trust typology by Lewicki and Bunker (1996) and highlight how this typology

relates to issues in agency theory and sociology about bank-small firm relationships. Second, we

examine how banking strategy and practices influence different trust dimensions, which in turn


affect customer satisfaction. Third, we empirically test the trust typology and the proposed

relationships between trusts antecedents and consequences. Finally, we discuss implications.

THE CONCEPT OF TRUST

Trust has been approached from multiple disciplines, perspectives, and levels of analysis,

producing a multiplicity of meanings for the term (Rousseau, Sitkin, Burt & Camerer, 1998).

Despite this, nearly all scholars agree that there are two essential elements to the concept of trust:

positive expectations and a willingness to be vulnerable (Rousseau et al., 1998: 394). Positive

expectations are confident beliefs held by Party A that Party B will act in a fashion that is

consistent with Party As welfare (Zucker, 1986). Vulnerability can be conceived as risk of

potential loss and suggests that the trustor is willing to take a risk by placing his or her welfare in

the hands of another (Mayer, Davis & Schoorman, 1995). Therefore, we adopt a general

conceptualization of trust put forth by Rousseau et al (1998) to guide this study: Trust is a

psychological state comprising the intention of one party to accept vulnerability based upon

positive expectations of the intentions or behavior of another party.

It is worth noting that this general definition of trust captures the fundamental

relationship of a principal-agent situation: a principal authorizes an agent to act on his or her

behalf and the principals welfare can be affected by the agents actions (Jensen & Meckling, 1976).

One might conclude that rational principals only willingly place their welfare in an agents hands to

the extent that they have positive expectations that the agent will carry out what they have been

charged with. That is, as Shapiro (1987) points out from a more sociological perspective, within

each principal-agent relationship lies an act of trust.


Three Dimensions of Trust

Recent discussions in the trust literature suggest that trust is a multi-dimensional

construct that can take various forms (e.g., Lewicki & Bunker, 1996; McAllister, 1995). For

instance, Zucker (1986) discusses three forms of trust: institutional-based trust that flows from

legal and financial systems that feature safeguards against and punishments for malfeasance;

process-based trust that flows from past interactions and reputation; and, characteristic-based

trust that is tied to ethnicity or familial ties. Alternatively, McAllister (1995) proposes two forms

of trust: cognitive-based trust that is based upon beliefs about anothers abilities; and, affective-

based trust, which founded upon social-psychological bonds between parties. Building on earlier

work by Shapiro, Sheppard, and Cheraskin (1992), Lewicki and Bunker (1996) proposed three

bases of trust: calculus, the rational calculations of rewards and punishments; knowledge, the

possession of specific information of the other party; and, identification, appreciation of and

identity with the other party.

We found Lewicki and Bunker's (1996) trust typology particularly useful for exploring

investor relationships with small businesses. First, the typology is compatible with a dyadic

(bank-borrower) level of analysis. Second, as we will detail below this typology allows

researchers to better capture the complex, multi-dimensional nature of bank-firm relationships

while simultaneously shedding light on other theoretical explanations of these relationships.

Calculus-Based Trust (CBT)

CBT emphasizes the pragmatic and rational consideration of self-interest between

interdependent parties whose compliance is ensured by a system of punishments and rewards

(Lewicki & Bunker, 1996). In other words, Party A confidently enters into a vulnerable situation


because it is in Party Bs rational self-interest to behave in a fashion that is consistent with Party

As welfare. These authors extend Shapiro, et al.s (1992) notion of deterrence based trust

because CBT is grounded not only in the fear of punishment violating the trust but also in the

rewards to be derived from preserving it (Lewicki & Bunker, 1996: 120).

CBT is most consistent with agency theorys focus on reward structures and how they

will guide/align actions that constrain opportunism. Goal aligning mechanisms which provide a

basis for trust may include various contractual remedies, reputations within common networks,

or information spread through institutional mechanisms (Granovetter, 1985; Shapiro, 1987;

Zucker, 1986). Within banking, examples of such mechanisms abound which leads some to

conclude that CBT pervades investor-investee relationships (Harrison, Dibben & Mason, 1997).

For example, contracts for time deposits, cash management services, and financial advice

provide for legal remedies (e.g. punishments) should either the bank or business break the

contract. In the case of loan default, banks can confiscate collateral that acts as a punishment to

motivate loan contract compliance. Conversely, timely loan repayment establishes a reputation

as a good credit risk.

Rousseau et al., (1998) argue that the above control structures are not trust per se but

instead a substitute for trust. While recognizing that CBT characterizes impersonal, arms length

business relationships, we nevertheless maintain that the emergence or existence of these control

mechanisms generates sufficient positive expectations between unfamiliar parties such that they

are willing to enter into vulnerable situations. As suggested by Zucker (1986), institutional

control mechanisms within the banking industry arose to reduce opportunism and uncertainty for

parties not embedded in social relationships. Uzzi (1999) found that arms length ties played

an important role in helping small firms obtain favored treatment in the form of lower interest


rate loans. It is in this sense of acceptance of vulnerability on the basis of positive expectations

that the control mechanisms constitute a form of trust. From a developmental perspective, CBT

allows relative strangers to become sufficiently comfortable to begin interaction and develop

their relationship into higher trust forms. This is why Lewicki and Bunker (1996) consider CBT

to arise in the early stages of trust development. For the purpose of our current study, which is

not concerned with the process of trust development, CBT represents the more prevalent aspect

of business relationships that are less affected by specific knowledge of or affiliation with the

transacting parties.

Knowledge-Based Trust (KBT)

KBT emphasizes information that accumulates over time through repeated interactions,

making the parties behaviors more predictable, and is developed through frequent contact and

communication that facilitate an understanding of each partys wants, preferences, and

approaches to problems (Lewicki & Bunker, 1996: 121). KBT is similar to Zucker's (1986: 60)

process-based trust in the sense that it is an imputation from outcomes of prior exchange, [that]

provides data on the exchange process and to McAllisters (1995) notion of cognitive-trust

which is defined as an understanding of a partys capabilities and intentions. Consequently, with

KBT Party A has confident expectations about entering into a vulnerable situation because he or

she has sufficient information about Party Bs past behaviors and intentions such that he or she

believes Party B will behave in a fashion that is consistent with his or her welfare.

Agency conceptualizations of bank-small firm relationships similarly suggest that a

primary benefit of bank-firm relationships is the reduction of asymmetric information (i.e.,

gaining information) through a history of interaction. The information gained is referred to as


private information regarding a particular borrowers activities from which lenders presumably

can form better predictions (Petersen & Rajan, 1994). From a sociological perspective,

sociologists suggest that information exchange between banks and small firms is enhanced by

embedding economic transactions in social relationships (Uzzi, 1999; Uzzi & Gillespie, 1999).

Primary outcomes of this information exchange is an enhanced understanding of both parties

abilities and intentions, and increased reliance on trust. KBT therefore captures the type of trust

arising from information exchange in socially embedded economic relationships.

Identification-Based Trust (IBT)

IBT emphasizes the mutual appreciation of each others wants and needs to the point

that each can effectively act for the other (Lewicki & Bunker, 1996: 122). IBT is similar to

what Rousseau et al. (1998) call relational trust and what McAllister (1995) calls affect-based

trust where emotion enters into relationships through frequent, long-term interaction. IBT is

also reflected in Ring and Van de Vens (1994) discussion of the development of social-

psychological bonds between interfacing individuals at their respective organizations. Through

numerous interactions a sense of identity between interacting parties develops, which facilitates

the emergence of trust in the goodwill of others and an understanding of constraints on the

relationship (Ring & Van de Ven, 1994: 100). Therefore, with IBT Party A has confident

expectations about entering into a vulnerable situation because mutual identification between the

parties motivates Party B to act in accordance with Party As welfare (Lewicki & Bunker, 1996).

Although not directly addressed in the agency theory literature, IBT underlies what others

in organization economics refer to as social control. For instance, Ouchi (1980) suggests that

through intensive socialization organizational members can come to sufficiently identify with an


organization such that intense employee monitoring is not needed. From social-relational

perspective, IBT characterizes deeply embedded ties between banks and small firms that create

value in the dyad and motivate exchange partners to share that value (Uzzi, 1999: 489).

To sum, financial scholars and sociologists talk about contractual control mechanisms,

information, and social embeddedness that surround bank-small firm relationships (Petersen &

Rajan, 1994; Uzzi, 1999; Uzzi & Gillespie, 1999; Zucker, 1986). We suggest that CBT, KBT

and IBT captures these dimensions within bank-firm relationships. Although the literature has

advanced to the point that many agree that trust is an important element in inter-organizational

relationships (e.g., Browning et al. 1995; Cummings & Bromiley, 1996; Doz, 1996; Ring & Van

de Ven, 1994), the existence of CBT, KBT and IBT between firms remains untested. We

therefore explicitly propose that:

Hypothesis 1: There are three distinct dimensions of trust in bank-small firm

relationships: CBT, KBT and IBT.

Relationships among the Trust Dimensions

To enrich our understanding of a multi-dimensional construct it is important to explicitly

specify the relationships among the dimensions (Law, Wong & Mobley, 1998). Lewicki and

Bunker (1996) suggest that these trust bases evolve through a stagewise process progressing

from an initial stage of relationship development that relies on CBT, to an intermediate stage that

relies on KBT, and finally a mature stage that relies IBT. These authors discuss both trusts

transformational nature (i.e., more mature forms substantially replace preceding forms and

require a fundamental perceptual shift about the relationship) and expansive, additive nature (i.e.,

more mature trust forms build upon preceding forms). These two views potentially suggest


different relationships among the three dimensions. If relationships transform from lower to

higher forms of trust, at a given point in time we would not expect to see the coexistence of all

three forms in a relationship because lower forms will be replaced by the higher forms.

Alternatively, if higher more mature trust forms build upon rather than replace lower trust forms

then we would expect coexistence of the trust forms. Further, as the three trust dimensions are

conceptualized as sub-dimensions of the general construct of trust, we would expect them to be

positively related to each other, even though at a given point in time one dimension may be more

or less potent than other dimensions.

The coexistent and expansive argument, we contend, reflects business relationships better

than the replacement argument. For example, business decisions based purely on affect and

identification, with no economic and contractual control mechanisms increases the vulnerability

of one or both parties, leading to potentially dangerous results (Ring & Van de Ven, 1994). In

view of the above discussion, we propose:

Hypothesis 2: CBT, KBT, and IBT will be positively related to each other.

ANTECEDENTS OF TRUST IN THE BANK: RELATIONAL STRATEGY AND

MANNAGEMENT CONTINUITY

Dunkleberg, Scott and Cox (1984) identified two important factors that small business

customers consider important in their banking relationships. One factor is a banks extra efforts

to go beyond arms length business transactions to collaborative activities such as helpfulness,

information sharing and flexibility. These banking practices constitute a relational business

strategy (Berlin & Mester, 1998; Elsas & Krahnen, 1998; Binks & Ennew, 1997; Haines, Riding

& Thomas, 1991) that is designed to build long-term customer relationships. Customer


relationships are an important means for differentiating a companys services from its

competition (Porter, 1980), and these relationships can lead to future sales opportunities (Bowen,

Siehl & Schneider, 1989). That is, through the identification of unique customer needs, banks

are able to cross sell other financial service products and increase the profitability of their

relationships with small firms (Berlin & Mester, 1998).

The second factor that small business customers consider important but has received little

research attention is management continuity. Management continuity refers to the continuance

of particular individuals or groups of individuals within specific organizational roles (Doz, 1996;

Ring & Van de Ven, 1994). In the context of serving small business customers (Dunkleberg et

al., 1984), it refers to the degree to which the bank employee(s) who interacts with a particular

small business customer remains constant over the duration of the firm-bank relationship.

Relational Strategy and Trust. A relational banking strategy with small business

customers can have different effects on each of the three forms of trust. As mentioned, CBT is

primarily generated through means such as contracts, collateral, credit ratings, which have

traditionally been the basic tenets of transactions between banks and small firms. However, a

relational strategy goes beyond these tenets by developing long-term relationships with small

business customers. Such relationship building activities will have significant positive effects on

KBT and IBT, but not CBT because they do not alter the economic reward structure.

A relational strategy enhances KBT primarily because it encourages communication and

information sharing with small business customers, through which both parties come to a better

understanding of each others' preferences (Lewicki & Bunker, 1996). Such exhibited

cooperative activities are important in the assessment of a partys trustworthiness (Mayer et al.,

1995). This allows a small firm to reflect on the banks track record for role related duties in


assessing the banks trustworthiness (Granovetter, 1985; McAllister, 1995) that provides a basis

for KBT development.

A relational strategy also fosters the development of IBT. Advice giving, sharing of

unrequired information, and helping act as signal of the bank's goodwill and intimacy (Das &

Teng, 1998: 505) and enhances the bank's credibility. Signals of goodwill and intimacy enhance

the perception of value congruence, identification, and commitment between the business

partners (Browning et al. 1995). Further, frequent dialogue and interaction facilitate personal

relationships and psychological contracts between parties, which facilitates moral integrity and

goodwill (Macualay, 1963 Ring & Van de Ven, 1994). In summary, while not expecting it to

have a significant effect on CBT, we expect relational strategy to have a significant positive

effect on both KBT and IBT. Hence:

Hypothesis 3: A relational banking strategy will have a positive effect on a small

business customers KBT and IBT in the bank.

Management Continuity and Trust. Management continuity can positively affect all

three dimensions of trust. First, management continuity fosters stability in the rules of game.

Although banks may prescribe broad control mechanisms for business relationships, the salience

and administration of these rules and regulations may vary among organizational actors that may

inhabit a particular organizational role. Management continuity of the bank enhances

consistency in enforcing the rules of the game, hence fostering the development of CBT.

Furthermore, Doz (1996) suggests that management continuity facilitates special understandings

and knowledge about a partners capabilities and ways of doing things. In the context of bank-

small firm relationships, management continuity of the bank allows small business customers to

-Dimensional Form and Role, Page 13

accumulate knowledge about the bank managers capabilities and preferences for handling their

account, and this knowledge is an underpinning of KBT. Finally, Ring and Van de Ven (1994)

suggest if interacting individuals remain the same, then through cycles of negotiation,

commitment to action, and commitment execution, interactions becomes more deeply socially

embedded. This ultimately results in greater reliance on psychological contracts, and personal

relationships in governing the relationship. Further, it has been found that deeply embedded

bank-small firm relationships are capable of developing common understanding and values

(Uzzi, 1999) which fosters IBT.

To sum up the above discussion, management continuity will create positive expectations

about future actions through introducing rule consistency, knowledge, and identification between

the small business customer and the bank. More formally we hypothesize:

Hypothesis 4: Bank management continuity will have a positive effect on a small

business customers CBT, KBT, and IBT in the bank.

The Interaction Between Relational Strategy and Management Continuity.

The presence of management continuity allows bank managers to implement a relational

strategy more seamlessly. That is, the continuing bank managers are in a better position to attend

to small business customers problems and needs by offering relevant help and advice because

they have accumulated knowledge about customers. Conversely, when management continuity

is low, new bank managers need to start from scratch about the nuances of a small business

clients business, marketplace, and other unique circumstances. Details of past problems and the

solutions to those problems are lost, and time and energy must be spent by both parties to get

ious relationship. Consequently, it makes it difficult for the new


manager to effectively implement the relational strategy with a given client. We therefore

propose that management continuity will enhance the positive effect of relational strategy on

KBT and IBT. More specifically:

Hypothesis 5: The positive effect of relational banking strategy on a small business

customers KBT and IBT in the bank will be greater under high management continuity

than under low management continuity.

THE EFFECT OF TRUST ON CUSTOMER SATISFACTION

Broadly, customer satisfaction refers to how positive a customer's evaluation is of the

focal companys products and service (Goodman, Fichman, Lerch, & Snyder, 1995). In bank-

small firm business transactions, customer satisfaction refers to satisfaction with various service

related factors including: offering advice, understanding of the clients business, market, and

financial needs, and the banks ability get the job done (Dunkelberg et al 1984; Riding, Haines

& Thomas, 1994). Research investigating bank relationships with small business clients

identifies customer satisfaction with service as an important outcome to both banks and small

businesses (Dunkelberg et al. 1984; Ennew & Binks, 1997; Haines, et al. 1991). Customer

satisfaction is also used as a measure of bank efficacy (Schnieder, Parkington & Buxton, 1980).

Previous research has found that bank customer satisfaction is affected by the closeness

and strength of bank-firm relationships and that such relationship may include a special

emotional status [that] exists between the customer and the service provider. (Barnes, 1997:

770). To the extent that trust is indicative of closeness and strength, we expect greater trust in

the bank should generate greater satisfaction with the bank. However, given the distinctive

nature of the three trust dimensions, we would like to focus on the different impact size the


different trust dimensions have on customer satisfaction. As had been previously argued, CBT,

KBT, and IBT are distinct and that each higher form of trust contains additional social and/or

affective elements that have been absent in the lower forms of trust. Accordingly we suggest

that the higher the trust form, the stronger and closer is the relationship. Since the strength of

relationship is associated with the degree of service satisfaction, we expect higher forms of trust

to have greater positive impact on service satisfaction.

Hypothesis 6a: IBT will have stronger positive effect on customer satisfaction with the

bank than will KBT.

Hypothesis 6b: KBT will have stronger positive effect on customer satisfaction with the

bank than will CBT.

METHODS

Design

We employed a matched sample design of bank customers and respective bank managers

that have responsibility for each customers account. This design allows for the reduction of

common method bias by using two separate sources to measure bank-level independent variables

and customer-level dependent variables. In addition, we used multiple bank managers at the

middle and top levels as informed observers (Chen, Farh & MacMillan, 1993) to construct some

of the bank-level independent variables.

Samples and Procedures

Participating Banks. Since large banks are generally less involved with small business

clients (Strahan & Weston, 1998), we targeted moderately sized banks with total assets of $100

million to $10 billion to provide for variation independent of organizational size. Twenty-two


banks from Connecticut, Missouri, New Jersey, and Pennsylvania participated fully in the study

representing a 7.67 percent participation rate, and participation rates between states did not differ

significantly (c2 = 4.55, n.s.). The median total assets for banks that participated was $248.5

million versus $237.2 million for banks that did not, a difference that is not statistically

significant according to an ANOVA (F = 0.95, n.s.).

The Sample of Small Business Customers. Each bank compiled a list of small business

customers that had both deposit and lending relationships with the bank. Small business

customers were defined in terms of having a credit limit of $1 million, a criterion consistent with

that adopted by U.S. Small Business Administration. To achieve a random sampling, 350

surveys were distributed to the nth customer on an alphabetically ordered list at each bank (n =

number of customers on list/350). For banks with fewer than 350 customers, all customers

received the survey. Cover letters from the respective banks accompanied the survey and

requested that the survey should be completed by the person in your organization that is chiefly

A total of 7,298 surveys were distributed. Overall, 1,093 surveys were returned

representing a 14.98 percent response rate, and 867 were complete representing a 11.89 percent

usable response rate. The responding companies had a median age of 15 years, a median of 6

non-owner full-time employees, median annual sales in the $500 thousand to $1 million range,

and conducted business with the bank a median of 5 years.

The Sample of Bank Managers. Each responding customer identified the bank officer

primarily responsible for the companys account. In addition, bank management identified the

executive in charge of small business lending operations. All together 263 bank top- and middle-

level managers were identified and sent surveys, whose participation was promised to be


confidential. Managers returned 217 surveys representing an 82.51 percent response rate. These

managers had a median tenure of 7 years with their banks. Occupations and the percentages of

respondents in them were as follows: president, 5.6 percent; executive in charge of small

business lending, 7.0 percent; branch manager, 47.9 percent; lending officer, 31.2 percent;

customer relationship manager, 3.7 percent; and other, 4.6 percent.

Measures

CBT, KBT, and IBT. Following a procedure similar to Cummings and Bromiley (1996),

we developed a new trust measure for this research. First, drawing upon previous trust measures

(e.g., Butler, 1991; Cummings & Bromiley, 1996; McAllister, 1995) we adapted and created

items for each form of trust. Several constraints guided item development: 1) The word trust

was not used in order to reduce the effect of social desirability; 2) Items either reflected calculus,

knowledge, or identification; 3) Items were tailored to reflect the context of bank-firm

relationships.

A list of twenty-one items was developed. Nine doctoral students uninvolved with this

research were asked to put the items into three categories based on three brief trust definitions.

We used Cohens kappa (Cohen, 1960) to assess the inter-rater agreement of the categorization.

Kappas for all but two items were above the recommended .70 threshold, which provided

preliminary evidence for the discriminant validity of the trust items. For the next validation

stage, we dropped the two items that failed to meet the .70 threshold.

To further explore the validity of the measures, we created three different banking

scenarios each expected to elicit one of the trust dimensions. We distributed these scenarios to

342 undergraduate business and MBA students. Each student received one scenario and rated


the trustworthiness of the other party along the three trust dimensions. The sample was split: one

third for exploratory factor analysis and the balance for confirmatory factor analysis. Based on

results of both exploratory and confirmatory factor analyses, four final items for each trust

dimension were selected for the present field study.

Results of confirmatory factor analyses show that the field data of the small business

customers fit satisfactorily with the model of three trust dimensions. All of the fit indices are

within acceptable levels as prescribed by Hu and Bentler (1995) and Stiegler (1990). As shown

in Table 2, factor loadings on each of the respective constructs are moderate to strong and each

factor loading is significant at the p < .001 level. The scale reliabilities for CBT, KBT, and IBT

are a = .79, .86, and .87 respectively.

Customer Satisfaction. We measured customer satisfaction with service by a four-item

scale adapted from Dunkelberg, Scott and Cox (1984). The items were measured using a 7-point

Likert-type scale with 1 (very dissatisfied) to 7 (very satisfied). The scale reliability for the

measure is a = .91. As shown in Table 2, service satisfaction items form a factor distinct from

the trust dimensions.

Relational Strategy. Drawing upon a review of the literature and previous measures

(Binks, Ennew & Reed, 1992; Haines, et al. 1991; Riding et al. 1994) we created and adapted an

initial pool of eight items regarding relationship building practices by the bank with their small

business customers. These items were pilot-tested on top- and mid-level managers from national

and state banks across the U.S. who were attending a bank professional organization meeting on

the topic of small business lending. Participants indicated their level of agreement with various

statements using a seven point scale with 1 (strongly disagree) to 7 (strongly agree). Based on


exploratory factor analyses, four items measuring relational strategy were reworded and retained

for the present study. Reliability coefficient of the four items for the present study is .80.

Management Continuity. Three original items for management continuity created from

a review of relevant literature (Binks, et al. 1992; Dunkleberg et al., 1984; Haines, et al., 1991;

Riding, et al. 1994). The measure of management continuity was pilot-tested together with

relational strategy as described above. All the items survived the test and were used for the

present study. The scale reliability for the present study is a = .72.

To further examine the discriminant validity of relational strategy and management

continuity, a confirmatory factor analysis was conducted on items for the two new scales and

items for the two major control variables formalization and centralization. As Table 3

demonstrates, all of the fit indices reached acceptable levels prescribed by Hu and Bentler (1995)

and Stiegler (1990). Factor loadings on each of the respective constructs are moderate to strong

and each factor loading is significant at the p < .001.

Control Variables. We controlled for bank and small firm organizational and contextual

variables known to affect inter-organizational trust and bank-small firm relationships. Bank

organizational variables included: bank size, market location, bank formalization, and bank

centralization (Doz, 1996; Hawawini & Swary, 1990; Petersen & Rajan, 1994; Strahan &

Weston, 1998; Uzzi, 1999). Bank size was measured as the natural log of total assets and these

data were collected from each banks 1999 annual report. Market location was a dummy variable

with banks headquartered in each respective state coded as 1 and all other banks coded as 0. We

measured bank formalization by adapting three items from Nohria and Ghoshal (1994) to reflect

a bank's dealings with small business clients. Bank managers were asked to indicate their level

of agreement using a seven point Likert-type scale from 1 (strongly disagree) to 7 (strongly


agree). The scale reliability for formalization is a = .78. Finally, we measured bank

centralization by adapting three items from Nohria and Ghoshal (1994). Each item was

measured by asking bank managers to indicate the degree that decisions regarding lending, credit

terms, and fees are centralized within the bank, ranging from 1 (Central management/customer

service center alone), 4 (Equal input), to 7 (An account officer/the branch alone). The scale

reliability for centralization is a = .94.

Small firm characteristics and contextual variables identified as important to bank-small

firm relationships include: log of a firms sales revenue, number of employees, firms age, age of

the bank-small firm relationship, and level of interdependence between the firms (Dunkleberg,

1998; Gulati, 1994; Lewicki & Bunker, 1996; Petersen & Rajan, 1994; Sheppard & Sherman,

1998; Uzzi, 1999). All of these variables were based on the reports of the small business

customers. The log of a firms sales revenue was the total revenues for the most recent fiscal year

using a logarithmic scale of: 1, less than $250 thousand; 2, $250 to $500 thousand; 3, $500

thousand to $1 million; 4, $1 million to $2 million; 5, $2 million to $4 million; 6, $4 million to

$8 million; and 7, over $8 million. Number of employees referred to the number of full-time

non-owner employees. Small firms age was the number of years that the firm has been in

operation. The age of the bank-firm relationship was the number of years the company has

conducted business with the bank. Finally, interdependence between firms was a dummy

variable with 1 indicating the bank was the companys primary financial bank and 0 if it was not.

Analysis

The Aggregation of Organizational Level Variables. Aggregating employee

perceptions is a valid means to measure organizational level variables (Rousseau, 1985) and


reduces error by averaging out individual biases and errors (Robinson & OLeary-Kelly, 1998).

However, inter-rater reliabilities should be established before aggregation (Chen, Farh &

Macmillan, 1993). Values above 0.70 are considered desirable (George, 1990). We estimated

the rwg(j) statistics of manager perceptions on various bank-level constructs for each bank

according to the procedures outlined in James, Demaree, and Wolf (1984, 1993), This analysis

using a rectangular uniform null distribution yielded values that indicate acceptable agreement

for all variables. Values for relational strategy ranged from 0.73 to 0.96 with a median of 0.84.

Values for management continuity ranged from 0.72 to 0.96 with a median of 0.84. Values for

formalization ranged from 0.70 to 0.93 with a median of 0.81, and values for centralization

ranged from 0.71 to 0.90 with a median of 0.79.

Multicollinearity. In order to reduce multicollinearity, we centered relational strategy

and management continuity before creating the interaction term (Neter, Wasserman & Kunter,

1990). We tested for multicollinearity and found no problems as all Variance Inflation Factors

(VIF) were well below the suggested 10 cut-off level (Neter, Wasserman & Kunter, 1990).

Hypothesis Testing. A confirmatory factor analysis results was used to test Hypothesis 1

about the distinctiveness of the three dimensions of trust. In addition, two sets of hierarchical

linear regressions were conducted to test the rest of the hypotheses. In the first set of regressions

examining the effects of trust antecedents, the dependent variables were the three dimensions of

trust. We entered the control variables in the first step, relational strategy and management

continuity in the second, and the interaction between relational strategy and management

continuity in the third. Finally, in the fourth step when the dependent variables were KBT and

IBT, we included the lower trust form(s) to examine if, after holding for constant other variables,

the lower trust form(s) still significantly contributed to the higher trust forms.


In the second set of hierarchical regression analyses examining the effects of trust on

customer satisfaction, we entered in step one all of the control variables, bank strategy, and

management continuity, in steps two we controlled for two trust dimensions, and in step three we

entered the third trust dimension. We then compared the added explanation of variance of each

of the three trust dimensions while controlling for the other two.

RESULTS

Table 3 presents the means, standard deviations and Pearson correlations for all of the

variables. The correlations among the bank level variables are generally low and insignificant,

perhaps due to the small sample size of participating banks. One notable exception is the

significant positive relationship between bank size and formality.

Distinctiveness of the Three Dimensions of Trust. To test hypothesis 1 regarding

distinctiveness among the three trust dimensions, we performed a confirmatory factor analysis on

the combined trust data collected from both small business customers (n = 977) and bank

managers (n = 213) that participated in this study. The results of the confirmatory factor analysis

are: GFI = .93; NFI = .94; IFI = .94; TLI = .93; CFI = .94; RMSEA = .087. Since the fit indices

are within acceptable ranges as prescribed by Hu and Bentler (1995) and Stiegler (1990), we

conclude that the three-factor model fit the trust data adequately well and the three trust

dimensions form distinct factors. To further test for discriminant validity of the trust dimensions,

we conducted chi-square difference tests by fixing the correlation of each pair of two factors to

1.0 and comparing the chi-square value of the unconstrained model with the constrained model.

Each test showed large and significant between model chi-square differences indicating a loss of

fit and suggesting evidence of discriminant validity. Hypothesis 1 is therefore supported.


The Positive Relationship among the Three Dimensions of Trust. The significant

positive correlation coefficients among the three trust dimensions (Table 3) show that they are

positively related to each other, providing preliminary support for Hypothesis 2. In addition,

results of hierarchical linear regressions for KBT and IBT (Step 4, Table 4) showed that after

controlling for all other variables, CBT significantly contributed to KBT, and CBT and KBT

significantly contributed to IBT. Based on the consistent results of the correlational and

regressional analyses, we concluded that Hypothesis 2 is supported.

The Effects of Relational Strategy, Management Continuity and Their Interaction.

As shown in Step 2 of Table 4, relational strategy had a positive effect on KBT and IBT but not

on CBT. Hypothesis 3 is therefore supported. The regression results also found that although

management continuity significantly predicted CBT and KBT, it did not predict IBT. To explore

a possible curvilinear relationship between management continuity and IBT, a post hoc

examination was conducted. We discovered that there was indeed an overall positive but

diminishing relationship between management continuity and IBT. In any case, the results

showed partial support for Hypothesis 4. Results of the interaction effects found that the

interaction term was a significant predictor and explained significant variance of both KBT and

IBT. However, the direction of the interaction was opposite to what we hypothesized. As shown

in Figure 1, the positive effects of relational strategy on KBT and IBT are stronger under low

rather than high management continuity even though high management continuity on the average

generated higher trust. These results suggest that hypothesis 5 is not supported.

The Effect of Trust on Customer Satisfaction. Simple correlation coefficients show

that all trust forms are positively related to customer satisfaction (see Table 3). Additionally,

regression analysis results show that each trust dimension is positively related with customer


satisfaction after holding constant all the control variables, relational banking strategy, and

management continuity (CBT b = .28, p < .001; KBT b = .65, p < .001; IBT b = .71, p < .001).

To explore the relative effect size of each trust dimension, we explored the unique

explanation of variation of each trust dimension while controlling for the other two. As Table 5

(Step 2) shows, IBT explained a unique ten percent of the variance in customer satisfaction

whereas KBT explained only two percent. These results provide evidence in support of

Hypotheses 6a. Similarly, Table 5 (Step 2) demonstrates that CBT did not explain any additional

variance in customer satisfaction when controlling for the other two trust dimensions.

Hypothesis 6b is therefore supported. In sum, the positive effect of IBT on customer satisfaction

is greater than that of KBT, which in turn is greater than that of CBT.

DISCUSSION

The Multi-Dimensional Nature of Inter-Firm Trust

Although the inter-personal trust literature has moved toward a multi-dimensional

conception of trust, there has been little research that explores the multi-dimensionality of trust

between organizations. This study provides consistent evidence for the convergent and

discriminant validity of three trust dimensions in bank-small firm relationships. First, the trust

measures formed distinct factors along the trust dimensions. Second, as predicted, relational

strategy fostered KBT and IBT but not CBT. Third, again as theoretically predicted, we found

that the positive impact of trust on satisfaction varied among the trust dimensions: each

successively higher trust form offered greater power of explanation for customer satisfaction

than did the lower trust forms.


These results demonstrated the utility of a multi-dimensional trust perspective for

studying different aspects of bank-small firm relationships. Banking and management scholars

have long recognized the importance of calculated control mechanisms, and more recently, of

information and knowledge in governing the bank-customer business relationships (Petersen and

Rajan, 1994; Uzzi, 1999; Uzzi & Gillespie, 1999). That research has provided indirect evidence

for the effects of CBT and KBT. What has remained under-explored is the role of value

congruence, identification and affect. The fact that IBT not only existed, but had the strongest

impact on customer satisfaction in financial businesses that are supposed to be dominated by

economic rationality serves to underscore the promise of this form of trust in business

relationships. The multidimensional trust approach provides a parsimonious framework to study

and compare effects of economic, social, and psychological ties.

The Role of Relational Strategy and Management Continuity

We predicted that relative to relational strategy, a bank's management continuity in

serving small business customers would have a more pervasive effect in that it would produce

not only KBT and IBT but also CBT. While our prediction is supported regarding CBT and

KBT, management continuity did not show a significant linear relationship with IBT but rather a

curvilinear relationship, which shows a diminishing return of additional management continuity

in producing IBT. This suggests that having stable representatives interact on behalf of

organizations could generate trust up to a certain point. We feel that our findings regarding

management continuitys association with a small firms trust in the bank may in part be due to

the fact that management continuity allows the small firm to develop trust in the individual bank

manager. Consequently, further refinement of the model may be required to distinguish between


the trust that inter-organizational actors place in individuals at the other organization, as well as

the other organization itself (Zaheer, McEvily and Perrone, 1998).

The interaction of relational strategy and management continuity was in the opposite

direction of what we proposed. The unexpected finding may indicate that management

continuity can substitute some of the effect of relational banking strategy on creating KBT and

IBT. It is possible that management continuity naturally entails performing some of the

relationship building activities prescribed by a relational strategy. Consequently, when there is a

high level of management continuity, the positive effect of relational strategy is muted.

A related issue is the effect of the length of a relationship, which has been considered

important in both the trust typology (Lewicki & Bunker, 1996) and bank-firm relationships

(Petersen & Rajan, 1994; Uzzi, 1999). Yet, in this study, bank-firm relationships age is not

significantly related to any trust dimension or to customer satisfaction. This seems to suggest

trust and satisfaction may not automatically develop as a result of a relationships duration.

Factors such as relational strategy and management continuity tell more about how the parties

interact than the relationships duration.

Limitations

This study has two limitations that should be pointed out. First, the original trust

framework proposed by Lewicki and Bunker (1996) is one of trust development overtime. We,

however, operationalized and tested the model with cross-sectional survey data at a given point

in time. Our use of different samples for collecting data on trust antecedents and trust helped

reduced common method biases. Yet, the complex relationships among the three dimensions as

proposed by Lewicki and Bunker (1996) could better be delineated through longitudinal in depth


case studies. For instance, as a relationship matures towards higher trust forms, to what extent

are trusting parties (based on knowledge and or identification) willing to circumvent regular

calculus oriented banking practices? This is as much a theoretical as an empirical question. We

argued that at least in the United States banking industry the economic control devices created a

basis of trust, which remains even as KBT and IBT emerge. However, our argument cannot be

directly answered with the cross-sectional quantitative data. Future study using in depth

interviews and longitudinal data of long standing business relationships would be more

appropriate.

A second limitation of this study is the lack of data on mutual trust. Given the reciprocal

social nature of trust, future studies could explore antecedents and consequences of mutual trust

between interacting parties. The challenge for studying mutual trust is that it requires much

greater access to and disclosure from both banks and the small businesses about their

relationships.

Theoretical and Practical Implications

Despite this studys limitations, some important theoretical and practical implications can

be drawn. At the conceptual and theoretical level, we find the relationship between CBT on one

hand and KBT and IBT on the other of great interest and importance. A number of

considerations may help shed light on our finding that CBT contributed to both KBT and IBT.

The first is the difference between interpersonal and inter-organizational relationships. The

second is the difference between social and economic activities. And lastly, cultural differences

in dealing social and business relationships. Whereas our finding may make sense in financial

transactions between two organizations in an individualistic society, its replication is by no


means certain in social relationships, at the interpersonal level, or in collectivist cultures. For

example, it would be interesting to examine whether in Japan or Korea identification substitutes

for or coexists with CBT in bank-customer relationships and whether substitution led to recent

financial crises in the Asian societies.

A second theoretical implication of our study is the conception of banks business

strategy for studying bank-small business relationships. Given multiple independent nature of

trust dimensions, researchers may need to think about how these different trust dimensions

mediate the role between business-level strategy and numerous customer outcomes. For

example, individual customer attention is an efficacious, but expensive way of differentiating a

companys services from competitors (Porter, 1980). Relying heavily on this notion, many large

US banks choose to pursue cost leadership strategies that allow them to offer products at lower

interest rates and fees. However, cost leadership may not develop KBT or IBT, and these trust

forms may create switching costs for customers and relational rents for banks.

Practical implications for banks include potential prescriptions for modes of interaction

with small businesses to facilitate bank-small firm relationships. This study suggests at least two

effective ways of fostering client trust in the bank: pursuing a relational strategy that address the

special needs of the small businesses and designating stable personnel specializing in dealing

with small businesses. By adopting these strategic and administrative devices focusing on

enhancing the interfacing capacity of dealing with small businesses, banks can go a long way

towards winning not only trust but also business from their small business customers.


REFERENCES

Amit, R., Glosten, L. & Muller, E. 1990. Entrepreneurial ability, venture investments, and risk sharing. Management Science, 38(10): 1232-1245. Arrow, K. 1985. The economics of agency. In J.W. Pratt and R.J. Zeckhauser (Eds.). Principals and Agents: The Structure of American Business, 37-51. Boston, MA: Harvard Business School Press.

Barnes, J.G. 1997. Closeness, strength, and satisfaction: Examining the nature of the relationship between providers of financial services and their retail customers. Psychology and Marketing, 14 (8): 765-790.

Berlin, M. & Mester, L.J. 1998. On the profitability and cost of relationship lending. Journal of Banking and Finance, 22: 873-898.

Berger, A. & Udell, G. 1998. The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking and Finance, 22: 613-673.

Binks, M.R., Ennew, C.T. & Reed, G.V. 1992. Information asymmetries and the provision of finance to small firms. International Small Business Journal, 11(1): 35-46.

Binks, M.R. & Ennew, C.T. 1997. Smaller businesses and relationship banking: The impact of participative behavior. Entrepreneurship Theory and Practice, 21(4): 83-92.

Bowen, D.E., Siehl, C. & Schneider, B. 1989. A framework for analyzing customer service orientations in manufacturing. Academy of Management Review, 14(1): 75-95.

Browning, L.D., Beyer, J.M. & Shelter, J.C. 1995. Building cooperation in a competitive industry: SEMATECH and the semiconductor industry. Academy of Management Journal, 38(1): 113-151.

Butler, J.K. 1991. Toward understanding and measuring conditions of trust: Evolution of a conditions of trust inventory. Journal of Management, 17(3): 643-661. Cable, D.M. & Shane, S. 1997. A prisoners dilemma approach to entrepreneur-venture capitalist relationships. Academy of Management Review, 22(1): 142-176. Chen, M., Fahr, J. & MacMillan, I. 1993. An exploration of the expertness of outside informants. Academy of Management Journal, 36(6): 1614-1632.

Churchill, N. & Lewis, V. 1986. Bank lending to new and growing enterprises. Journal of Business Venturing,1(2): 193-206.


Cohen, J. 1960. A coefficient of agreement for nominal scales. Educational and Psychological Measurement, 20: 37-46.

Cummings, L.L. & Bromiley, P. 1996. The organizational trust inventory (OTI): Development and validation. In R.M. Kramer & T.R. Tyler (Eds.). Trust in Organizations: Frontiers of Theory and Research: 302-330. Thousand Oaks, CA: Sage Publications.

Das, T.K. & Teng, B. 1998. Between trust and control: Developing confidence in partner cooperation in alliances. Academy of Management Review, 23(3): 491-512.

Donaldson, L. 1990. The ethereal hand: Organization economics and management theory. Academy of Management Review, 15: 369-381.

Doz, Y.L. 1996. The evolution of cooperation in strategic alliances: Initial conditions or learning processes? Strategic Management Journal, 17: 55-83.

Dunkelberg, W., Scott, J. & Cox, E. 1984. Small business and the value of bank-customer relationships. Journal of Bank Research, 14(5): 248-258.

Elsas, R. & Krahnen, J.P. 1998. Is relationship lending special? Evidence from credit-file data in Germany. Journal of Banking and Finance, 22: 1283-1316.

George, J.M. 1990. Personality, affect, and behavior in groups. Journal of Applied Psychology, 75: 107-116. Goodman, P.S., Fichman, M., Lerch, F.J. & Snyder, P. 1995. Customer-firm relationships, involvement, and customer satisfaction. Academy of Management Journal, 38(5): 1310-1324. Granovetter, M. 1985. Economic action and social structure: The problem of embeddedness. American Journal of Sociology, 78: 1360-1380.

Haines, G., Riding, A. & Thomas, R. 1991. Small business bank shopping in Canada. Journal of Banking and Finance, 15: 1041-1056.

Harrison, R.T., Dibben, M.R. & Mason, C.M. 1997. The role of trust in the informal investors investment decision: An exploratory analysis. Entrepreneurship Theory and Practice, 21(4): 63-81.

Hawawini, G.A. & Swary, I. 1990. Mergers and Acquisitions in the U.S. Banking Industry: Evidence from the Capital Market. New York: Elsevier Science.

Hu, L. & Bentler, P.M. 1995. Evaluating Model Fit. In R.H. Hoyle (Ed.). Structural Equation Modeling Concepts, Issues and Applications: 76-99. Thousand Oaks, CA: Sage Publications.

James, L.R., Demaree, R.G. & Wolf, G. 1984. Estimating within-group interrater reliability with and without response bias. Journal of Applied Psychology, 69: 431-444.


James, L.R., Demaree, R.G. & Wolf, G. 1993. rwg: An assessment of within-group interrater agreement. Journal of Applied Psychology, 78: 306-309.

Jensen, M.C. & Meckling, W.H. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3: 305-360. Law, K.S., Wong, C. & Mobley, W.H. 1998. Toward a taxonomy of multidimensional constructs. Academy of Management Review, 23(4): 741-755. Lewicki, R.J. & Bunker, B.B. 1996. Developing and maintaining trust in work relationships. In R.M. Kramer & T.R. Tyler (Eds.). Trust in Organizations: Frontiers of Theory and Research: 114-139. Thousand Oaks, CA: Sage Publications. Maculuay, S. 1963. Non-contractual relations in business: A preliminary study. American Sociological Review: 55-67. Mason, C. & Harrison, R. 1999. Venture Capital: Rationale, Aims, and Scope. Venture Capital, 1:1-46.

Mayer, R.C., Davis, J.H. & Schoorman, D. 1995. An integrative model of organizational trust. Academy of Management Review, 20: 709-734.

McAllister, D. J. 1995. Affect and cognition based trust as foundations for interpersonal cooperation in organizations. Academy of Management Journal, 38: 24-59.

Neter, J., Wasserman, W. & Kunter, M.H. 1990. Applied Statistical Models, 3rd Edition, Burr Ridge, IL: Richard D. Irwin, Inc. Nohria, N. & Ghoshal, S. 1994. Differentiated fit and shared values: Alternatives for managing headquarters-subsidiary relations. Strategic Management Journal, 15: 491-502. Ouchi, W.G. 1980. Markets, bureaucracies, and clans. Administrative Science Quarterly, 25: 129-141.

Perrow, C. 1981. Markets, hierarchies, and hegemony: A critique of Chandler & Williamson. In A. Van de Ven & J. Joyce (Eds.). Perspectives on Organization Design and Behavior: 347-370. New York: Wiley.

Petersen, M. & Rajan, R. 1994. The benefits of firm-creditor relationships: Evidence from small business data. Journal of Finance, 49: 3-37. Porter, M.E. 1980. Competitive Strategy. New York: Free Press.

Riding, A., Haines, G. & Thomas, R. 1994. The Canadian small business-bank interface: A recursive model. Entrepreneurship Theory and Practice, 18(4): 5-24.


Ring, P.S. & Van de Ven, A.H. 1994. Developmental processes of cooperative inter-organizational relationships. Academy of Management Review, 19(1): 90-118.

Robinson, S.L. & OLeary, A.M. 1998. Monkey see monkey do: The influence of work groups on the antisocial behavior of employees. Academy of Management Journal, 41(6): 658-672.

Rousseau, D.M. 1985. Issues of level in organizational research. In B.M. Straw & L.L. Cummings (Eds.). Research in Organizational Behavior, vol. 7: 1-37. Greenwich, CT: JAI Press.

Rousseau, D.M., Sitkin, S.B., Burt, R.S. & Camerer C. 1998. Not so different after all: A cross-discipline view of trust. Academy of Management Review, 23(3): 405- 421.

Schnieder, B., Parkington, J.J. & Buxton, V.M. 1980. Employee and customer perceptions of service in banks. Administrative Science Quarterly, 25: 252-267.

Shapiro, S.P. 1987. The social control of impersonal trust. American Journal of Sociology, 93: 623-658. Shapiro, D., Sheppard, B.H. & Cheraskin, L. 1992. Business on a handshake. Negotiation Journal, (8): 365-377. Sheppard, B.H. & Sherman, D.M. 1998. The grammars of trust: A model and general implications. Academy of Management Review, 23(3): 422-437.

Strahan, P.E. & Weston, J.P. 1998. Small business lending and the changing structure of the banking industry. Journal of Banking and Finance, 22: 821-845.

Stiegler, J.H. 1990. Structural model evaluation and modification: An interval estimation approach. Multivariate Behavioral Research, 25: 173-180.

Uzzi, B. 1999. Embeddedness in the making of financial capital: How social relations and networks benefit firms seeking financing. American Sociological Review, 64: 481-505.

Uzzi, B & Gillespie, J.J. 1999. Interfirm relationships and the firms financial capital structure: The case of the middle market. Research in the Sociology of Organizations, 16: 107-126.

Zaheer, A., McEvily, B. & Perrone, V. 1998. Does trust matter? Exploring the effects of interorganizational and interpersonal trust on performance, Organization Science, 9(2): 141-159.

Zucker, L.G. 1986. The production of trust: Institutional sources of economic structure. In B.M. Straw and L.L. Cummings (Eds.). Research in Organizational Behavior, vol. 8: 55-111, Greenwich, CT: JAI Press.


TABLE 1 Results of Confirmatory Factor Analysis For The Three Trust Basesa, b

Items Factor Loadings

Calculus-Based Trust We believe ____ complies with our agreements because they know the benefits of compliance.

.79

We believe ____ complies with our agreements because they know the economic costs of a damaged business reputation.

.70

We believe ____ complies with our agreements because they know the economic benefits of an enhanced business reputation.

.80

We believe ____ complies with our agreements because it is in their own self-interest to do so. .52 Knowledge-Based Trust From past dealings, we know ____ is dependable. .85 From past dealings, we can predict how ____ may act with fair accuracy. .78 From past dealings, we know _____ has been open in describing their strengths and weaknesses in past negotiations.

.62

Given ____s track records, we generally see little reason to significantly doubt their competence.

.84

Identification-Based Trust We can freely share concerns and problems about our company and know that ____ will be interested in listening.

.90

We can freely share concerns and problems about our company and know that ____ will respond constructively.

.89

We share common business values with ____. .78 We feel that ____ would act in a fashion consistent with what we would recommend without prior discussion with us.

.66

Customer Satisfaction with Service The banks provision of business/financial advice and other helpful information. .83 The banks knowledge of our business. .91 The banks knowledge of the local market/community. .83 The banks anticipation of our credit and other financial needs. .82 Goodness-of-fit indices c2(df) 638.00 (98) p < .000 GFI = .92; NFI = .93; IFI = .94; TLI = .93; CFI = .94; RMSEA = .080

a All factor loadings in this table are from the standardized solution. b All factor loadings in this table are significant at the p < .001.


TABLE 2 Results of Confirmatory Factor Analysis For Bank Level Variablesa, b

Items Factor Loadings

Independent Variables Relational Strategy The bank encourages bank managers to play a helpful and advisory roles with their small business clients.

.67

The bank encourages bank managers to act with significant flexibility in meeting small business client borrowing and other financial needs.

.65

The bank focuses on improving bank-small business relationships by selling products that fit a specific clients needs.

.77

The bank attempts to understand the business and marketplace of its small business clients .73 Management Continuity One employee or a small team of employees handles a given small business clients accounts across various product and service lines.

.59

Employees with direct client interaction are rotated between branches and/or departments on a regular basis.

.75

There is low employee turnover among employees with direct small business customer interaction.

.72

Control Variables Formalization Management provides a well-defined set of rules and procedures for interaction with small business clients.

.89

To the extent possible, there are manuals that define the courses of action to be taken under different situations

.66

Central management continuously monitors those employees that interact with clients to ensure that rules and procedures are not violated.

.69

Centralization Decision to grant small business loans are generally made by: .94 Changes in fee structures or waivers of fees for a small business client are generally made by: .89 Decisions regarding changes in loan payment schedules or debt restructuring for small business clients are generally made by:

.92

Goodness-of-fit indices c2(df) 99.10 (59) p < .001 GFI = .94; NFI = .93; IFI = .97; TLI = .96; CFI = .97; RMSEA = .056

a All factor loadings in this are from the standardized solution. b All factor loadings in this table are significant at the p < .001.


TABLE 3 Descriptive Statistics and Correlations

Variable Mean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 13 Small Firm Level Variablesa

1. Sales 3.33 1.84 2. Employees 19.34 40.91 .49** 3. Firms Age 20.82 21.15 .19** .22** 4. Relation- ship Age

9.45 10.41 -.03 .04 .38**

5. Main Bankb .86 .35 -.06 -.06 .02 .16** 6. CBT 20.21 4.73 .09** .06 .00 -.04 .09** 7. KBT 23.16 3.96 .03 .03 .06 .06 .17** .38** 8. IBT 21.90 4.79 .09** .07 .06 .00 .16** .40** .77** 9. Satisfaction 21.60 5.12 .07* .09* .01 .01 .13** .32** .67** .74** Bank Level Variablesc

10. Assetsd 5.84 .90 .20** .14** .00 -.09** .06 .03 -.01 .02 .01 11. Formality 12.17 1.60 .16** .07* .04 -.07* -.03 -.02 -.05 -.06 -.12* .13 12. Centralization 12.43 3.34 .15** .10** -.03 -.09** -.01 .05 .07 .11** .15** .48* -.14 13. Relational Strategy

21.74 1.98 .14** .11** -.05 -.11** .06 .08* .15** .14** .07* .12 .33 .22

14. Continuity 16.16 1.41 -.01 .02 .03 .07 .14** .11** .17** .14** .19** .12 .20 .31 .40 a n = 867 b Coded as dummy variable with banking institution is primary financial institution = 1, not primary financial institution = 0. c n = 22 d Logarithm of total assets. * p < .05 ** p < .01


TABLE 4 Hierarchical Regression Analysis Results for CBT, KBT and IBTa

CBT KBT IBT

Variables Step 1 Step 2 Step 3 Step 1 Step 2 Step 3 Step 4 Step 1 Step 2 Step 3 Step 4

PAb .08 .05 .05 .16** .19** .19** .17** .13* .15* .15* .01 MO b .08 .06 .09 .16** .16** .19*** .16** .11* .11* .11* .00 CTb .04 .11* .10* -.01 .06 .04 .01 .00 .06 .04 .00 Bank Sizec .02 .07 .03 -.05 .01 -.04 -.05 -.04 .01 -.05 -.02 Formalization .01 -.07 -.05 .07 .00 .03 .04 .02 -.04 .00 -.02 Centralization .00 -.10+ -.08 .05 -.07 -.05 -.02 .07 -.02 .00 .05 Firm Sales .09* .08+ .08* .04 .03 .04 .01 .09* .08* .09* .06* Firm Employees .02 .02 .01 .02 .00 .00 -.01 .02 .01 .01 .01 Firm Age -.01 -.02 -.01 .05 .05 .05 .05 .06 .05 .06 .02

Relationship Age -.06 -.05 -.05 -.01 .01 .00 .02 -.06 -.04 -.05 -.04+ Main Bankd .11** .10** .10** .17*** .15*** .15*** .12*** .17*** .15*** .16*** .04 Relational Strategy .05 .00 .17*** .10* .10** .14*** .05 -.02 Continuity .14** .14** .09* .09* .04 .07 .07 -.01 Relational X Continuity -.08+ -.11** -.09* -.14** -.05+ CBT .35*** .11***

KBT .72***

D R2 .03* .01** .00 .06*** .03*** .01** .12*** .06*** .02*** .01** .53*** R2 .03 .04 .04 .06 .08 .09 .21 .06 .08 .09 .62 Adjusted R2 .01 .03 .03 .04 .07 .08 .19 .05 .06 .07 .61

F 2.00* 2.68*** 2.74*** 4.55*** 5.99*** 6.09*** 14.80*** 4.86*** 5.51*** 5.87*** 85.52*** a Betas are standardized regression coefficients. bRespective US State Coded as = 1, others = 0 cLogarithm of total assets. dCoded as dummy variable with banking institution is primary financial institution = 1, not primary financial institution = 0. + p < .10 * p < .05 ** p < .01 *** p < .001


TABLE 5 Hierarchical Regression Analysis Results for Customer Satisfactiona

Test for CBT Test for KBT Test for IBT

Variables Step 1 Step 2 Step 3 Step 1 Step 2 Step 3 Step 1 Step 2 Step 3

PAb .19** .06 .06 .19** .08+ .06 .19** .07 .06 MO b .16** .03 .03 .16** .05 .03 .16** .04 .03 CTb .07 .03 .03 .07 .04 .03 .07 .03 .03 Bank Sizec -.05 -.01 -.01 -.05 -.02 -.01 -.05 -.03 -.01 Formalization -.03 -.04 -.04 -.03 -.03 -.04 -.03 -.04 -.04 Centralization .04 .05 .05 .04 .04 .05 .04 .07+ .05 Firm Sales .07+ .02 .02 .07+ .01 .02 .07+ .04 .02 Firm Employees .05 .05+ .05+ .05 .05+ .05+ .05 .05+ .05+ Firm Age -.01 -.05* -.05* -.01 -.05+ -.05* -.01 -.04 -.05*

Relationship Age -.02 .01 .01 -.02 .02 .01 -.02 -.02 .01 Main Bankd .13*** .01 .01 .13*** .01 .01 .13*** .02 .01 Relational Strategy -.03 -.08* -.08* -.03 -.07* -.08* -.03 -.09* -.08* Continuity .13** .07* .07* .13** .07* .07* .13** .06+ .07* Relational X Continuity -.16*** -.06+ -.06+ -.16*** -.06* -.06+ -.16*** -.08* -.06+ CBT .00 .02 .00 .06* .00

KBT .25*** .25*** .25*** .63*** .25***

IBT .53*** .53*** .70*** .53*** .53***

D R2 .10*** .49*** .00 .10 .47*** .02*** .10*** .39*** .10*** R2 .10 .59 .59 .10 .57 .59 .10 .49 .59 Adjusted R2 .09 .58 .58 .09 .56 .58 .09 .48 .58

F 7.02*** 76.76*** 72.16*** 7.02*** 69.57*** 72.16*** 7.02*** 50.12*** 72.16*** a Betas are standardized regression coefficients. bRespective US State Coded as = 1, others = 0 cLogarithm of total assets. dCoded as dummy variable banking institution is primary financial institution = 1, otherwise = 0. + p < .10 * p < .05 ** p < .01 *** p < .001


KBT & High Continuity

IBT & Low Continuity

KBT & Low Continuity

IBT & High Continuity

High

Low

Trust

Figure 1 Interaction Effects of Management Continuity and Relational Strategy on KBT and IBT

Low

High

Relational Strategy