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Does Banking Competition Affect Innovation?

49 Pages Posted: 8 Mar 2012 Last revised: 13 May 2014

Jess Cornaggia

Pennsylvania State University - Department of Finance

Yifei Mao

Cornell University - SC Johnson College of Business - Finance Department

Xuan Tian

Tsinghua University - PBC School of Finance

Brian Wolfe

State University of New York (SUNY) at Buffalo

Date Written: August 15, 2013

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 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

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

Jess Cornaggia

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://jesscornaggia.com

Yifei Mao

Cornell University - SC Johnson College of Business - Finance Department ( email )

Ithaca, NY 14850
United States

Xuan Tian (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Brian Wolfe

State University of New York (SUNY) at Buffalo ( email )

264 Jacobs Management Center
Buffalo, NY 14228
United States
7166453260 (Phone)

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