Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets

Abstract

This paper tests how competition in local U.S. banking markets affects the market structure of nonfinancial sectors. Theory offers competing hypotheses about how competition ought to influence firm entry and access to bank credit by mature firms. The empirical evidence, however, strongly supports the idea that in markets with concentrated banking, potential entrants face greater difficulty gaining access to credit than in markets where banking is more competitive.

The Real Effect of Foreign Banks

“…Stock-market capitalization (as a fraction of GDP) does not seem to contribute to firm growth per se (Specification 3) or decomposed by economic-development level (Specification 4), which is probably a reflection of the variable's poor performance as a measure of financial-market development. 15 Indeed, turnover measures (Specifications 5 and 6), which are a better measure of market depth and, hence, financial development, are not only statistically significant but their decomposition by economic-development level conforms to the previously identified pattern. The second exception concerns private bonds outstanding as a fraction of GDP, i.e., the existence of a well established corporate bond market, which significantly lessens firms' external financial dependence and increases their performance on its own (Specifications 9 and 10).…”

“…These findings suggest that developing countries might want to invest in financial and, more generally, institutional development to further real economic activity, a topic we turn to next. 15 High ratios of stock-market capitalization to GDP are often due to developing countries' small GDP and the presence of a few large firms typically concentrated in the commodities sector. Similarly, stock-market capitalization might not be representative of market depth because the free-float is often small in emerging economies.…”

Household wealth inequality, entrepreneurs’ financial constraints, and the great recession: evidence from the Kauffman Firm Survey

“…Another set of analyses have linked the development of capital markets to entrepreneurship. Black and Strahan (2002), Cetorelli and Strahan (2006), and Kerr and Nanda (2009), for instance, find large increases in startup activity subsequent to the US inter-state branch banking deregulation. Fisman and Love (2004) show that startup firms struggle with overcoming weaknesses in financial market development.…”

Bank Competition, Stock Market and Economic Growth in Ghana

“…Though there do not seem to be direct relationship between bank competition and economic growth of a country, recent empirical evidence suggests that bank competition fosters industrial growth (Claessens and Laeven, 2005) and helps in particular the financing of private and small firms that are perceived to be engine of economic growth (Cetorelli and Strahan, 2006;Giannetti and Ongena, 2005). According to Champonnois (2007) in most cases, the economy experiences a vicious circle in which the numbers of firms and banks eventually increase and converge to equilibrium with high aggregate investment and high welfare.…”