Evidence on the Effects of Bank Competition on Firm Borrowing and Investment

Abstract

The effects of bank competition on firm borrowing and investment are both theoretically ambiguous and of policy importance. This paper presents large sample evidence on the financial and real effects of bank competition at the firm level. I trace the impact of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which increased the competitiveness of U.S. banking markets, on a large panel of privately-held firms. Following the deregulation, newly formed firms used significantly less external debt, were smaller and had higher returns on assets, consistent with them investing less due to greater financial constraints. These effects diminish as firms age and ultimately reverse sign. The differential impact banking market reforms may have on newer and more established firms is underscored.

Keywords: Banking, Competition, Corporate debt, Firm performance

JEL Classification: G21, G32