Does banking competition affect innovation?

Abstract

We exploit the deregulation of interstate bank branching laws to test whether banking competition affects innovation. We find robust evidence that banking competition reduces state-level innovation by public corporations headquartered within deregulating states. Innovation increases among private firms that are dependent on external finance and that have limited access to credit from local banks. We argue that banking competition enables small, innovative firms to secure financing instead of being acquired by public corporations. Therefore, banking competition reduces the supply of innovative targets, which reduces the portion of state-level innovation attributable to public corporations. Overall, these results shed light on the real effects of banking competition and the determinants of innovation.

Competition and bank stability

“…This allows me to achieve a better identification of the impact of competition on bank stability. Even though my work is related to the literature regarding the real effects of intra-and interstate branching deregulation in the U.S. (Jayaratne and Strahan, 1996;Cornaggia et al, 2015;Rice and Strahan, 2010), I…”

External Financing Constraints and Firm Innovation

“…Our work is related to a strand of literature which investigates in several different ways the importance of bank financing for firms' innovative activity (e.g., Alessandrini et al [2010]; Amore et al [2013]; Ayyagari et al [2011]; Benfratello et al [2008]; Chava et al [2013]; Cornaggia et al [2015]; Hsu et al [2014]). Using a linked firm-bank data set offers a major advantage over studies that rely on the average degree to which banks were affected on a regional level in order to investigate the consequences of financial shocks or changes in regulation on firm behavior in that region (e.g., Amore et al [2013]; Chava et al [2013]; Cornaggia et al [2015]; Nanda and Nicholas [2014]). Thus, we do not rely on pooled geographical effects but can base our conclusions concerning the corporate customers' innovation behavior directly on the individual bank-related distress in the financial crisis.…”

Banking Consolidation and Small Firm Financing for Research and Development

“…These specifications give similar results, and I omit them for brevity. 20 For state i's regressor j, x i, j , the average marginal effect is…”

“…19 Table 4 presents the estimated average marginal effects from the baseline model. 20 Column (1) presents a parsimonious specification with only aggregate time dummies, state time trends, and state fixed effects. The marginal effects reported indicate the average change in SBIR applications by cohort for each FY subsequent to deregulation relative to the pre-IBBEA period.…”