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. This result is driven 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 corporations. Banking competition reduces the supply of innovative targets, generating an apparent reduction in corporate innovation. Overall, these results shed light on the real effects of banking competition and the determinants of innovation.

Number of Pages in PDF File: 49

Keywords: Banking competition, Innovation, Access to finance, External finance dependence, Mergers and acquisitions, Economic growth

JEL Classification: G21, G28, G34, O16, O31

working papers series