Does Banking Competition Affect Innovation?
Pennsylvania State University - Department of Finance
Cornell University - College of Business - Finance Department
Indiana University - Kelley School of Business - Department of Finance
State University of New York (SUNY) at Buffalo
August 15, 2013
Journal of Financial Economics (JFE), Forthcoming
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.
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
Date posted: March 8, 2012 ; Last revised: May 13, 2014