Does Credit Competition Affect Small-Firm Finance?

Abstract

States were granted authority to limit interstate branching following passage of Federal legislation in 1994 relaxing restrictions on geographical expansion by banks. We show that differences in state's branching restrictions affected credit supply. In states more open to branching, small firms borrow at interest rates 25 to 45 basis points lower than firms operating in less open states. Firms in open states also are more likely to borrow from banks. Despite this evidence that interstate branch openness expands credit supply, we find no effect of variation in state restrictions on branching on small-firm borrowing or other indicators of credit constraints.

Keywords: capital structure, small-firm finance, banking, deregulation

JEL Classification: G18, G21, G32