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 in which banking is more competitive. Copyright 2006 by The American Finance Association.

SURVIVING CREDIT MARKET COMPETITION*

“…The whole analysis is very much in the spirit of a corporate demography approach, thus concentrating its attention on individual firms, and following closely birth, life, and death events. See also, e.g., Morgan, Rime, and Strahan (2004), Cetorelli and Strahan (2006). Ideally, we would like to be able to observe individual firms over time, introduce the "treatment," that is the credit reform, and then, maintaining all-elseequal conditions, analyze any difference in the patterns of mortality among three different sets of firms: those that were born and lived in times prior to the reform, those that were born prior to the reform but that experience the new environment at some point in their life, and those firms born instead after the reform.…”

“…The concept of external financial dependence is that presented in Rajan and Zingales (1998) and extensively adopted in other studies (see Cetorelli and Strahan 2006;Kerr and Nanda 2008). The concept of external financial dependence is that presented in Rajan and Zingales (1998) and extensively adopted in other studies (see Cetorelli and Strahan 2006;Kerr and Nanda 2008).…”

“…The concept of external financial dependence is that presented in Rajan and Zingales (1998) and extensively adopted in other studies (see Cetorelli and Strahan 2006;Kerr and Nanda 2008). For more details on the calculation and for the relevance of this index to non-Compustat firms, see Cetorelli and Strahan (2006). Because I have firm-specific data for which I know the age, I can actually refine the standard measure of dependence proposed by Rajan and Zingales (1998), by conditioning the value of such indicator on firms' age.…”

Bank Structure and Lending: What We Do and Do Not Know

“…Relaxation of restrictions on cross-border banking in Europe in the early 1990s, as in the United States, was followed by bank consolidation and, if anything, better credit availability. Cetorelli and Strahan (2006) report similar evidence in the United States, where the relative importance of small firms in local economies increased after the removal of restrictions on interstate banking. As evidence, he shows that average firm size declined after reform and that this decline was concentrated in bankdependent industries.…”

Effects of Bank Branch Competition on Rural Firm Entry and Exit: Evidence from Hokkaido, Japan

“…Regarding the effect of bank competition on firm entry, Cetorelli and Strahan [18] analyse the impact of bank concentration on small US firms, and find that potential entrants face greater difficulty gaining access to credit if they operate in a more concentrated bank market. Rogers [19] Gambera [23] find that banking concentration has a negative effect on firm growth, although the effect was found to be heterogeneous across industries.…”