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


Nicola Cetorelli


Federal Reserve Bank of New York

Philip E. Strahan


Boston College - Department of Finance; National Bureau of Economic Research (NBER)

January 2004

FRB of Chicago Working Paper No. 2004-04

Abstract:     
This paper tests how competition in local U.S. banking markets affects the market structure of non-financial sectors. Theory offers competing hypotheses about how competition ought to influence firm entry and access to bank credit by mature firms. Using data on U.S. local markets for banking and non-financial sectors, we find that more vigorous banking competition - that is, lower concentration and looser restrictions on geographical expansion - is associated with more firms in operation and with a smaller average firm size. In fact, the whole firm-size distribution shifts toward the origin as our measures of banking competition increase. Because we exploit data at the industry level, we are able to control for alternative (omitted) variables that may drive market structure both within and outside banking by exploiting differential reliance on bank finance across industrial sectors.

Number of Pages in PDF File: 51

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Date posted: February 24, 2004  

Suggested Citation

Cetorelli, Nicola and Strahan, Philip E., Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets (January 2004). FRB of Chicago Working Paper No. 2004-04. Available at SSRN: http://ssrn.com/abstract=506002 or http://dx.doi.org/10.2139/ssrn.506002

Contact Information

Nicola Cetorelli (Contact Author)
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
212-720-5071 (Phone)
212-720-8363 (Fax)
HOME PAGE: http://nyfedeconomists.org/cetorelli/
Philip E. Strahan
Boston College - Department of Finance ( email )
Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)
HOME PAGE: http://www2.bc.edu/~strahan
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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