Local banking development and SME conservative financing policy. Does bank branch density matter?

Abstract

Does bank branch density matter for the conservative financing puzzle? This paper looks at the importance of nearby physical banking services to the decision to eschew debt among SMEs. Our multivariate logistic models rely on recent information from Portugal, a small open bank-based European economy, and control for firm-level and municipality-level effects. We show that banks' branch density at the municipality level increases the odds of local SMEs following a conservative financing policy. However, the weight of local cooperative bank branches relates negatively to the odds of not using debt. Several robustness checks concerning sampling procedures, estimation methods, and variables’ definitions corroborate our baseline results. Moreover, our results show that the effect of bank branches on the decision to eschew debt is economically more relevant for the long-term than the short-term debt.