49 Pages Posted: 8 Mar 2012 Last revised: 13 May 2014
Date Written: August 15, 2013
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 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 public corporations. Therefore, banking competition reduces the supply of innovative targets, which reduces the portion of state-level innovation attributable to public corporations. Overall, these results shed light on the real effects of banking competition and the determinants of innovation.
Keywords: Banking competition, Innovation, Access to finance, External finance dependence, Mergers and acquisitions, Economic growth
JEL Classification: G21, G28, G34, O16, O31
Suggested Citation: Suggested Citation
Cornaggia, Jess and Mao, Yifei and Tian, Xuan and Wolfe, Brian, Does Banking Competition Affect Innovation? (August 15, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2017928 or http://dx.doi.org/10.2139/ssrn.2017928