Banking Deregulation, Bargaining Power and Innovation

46 Pages Posted: 17 Jul 2012 Last revised: 29 Oct 2015

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Alexander Oettl

Georgia Institute of Technology - Strategic Management Area

Ajay Subramanian

Georgia State University

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

Date Written: July 17, 2012

Abstract

We show that finance influences innovation by young private firms, an important source of long-term economic growth. We develop a simple theoretical model that predicts that a decrease (increase) in banks' bargaining power vis-a-vis entrepreneurs increases (decreases) both the volume and riskiness of innovation. Using staggered banking deregulation by U.S. states as shocks to the bargaining power of banks, we find that, consistent with our hypotheses, inter-state banking deregulation increased both the level and riskiness of innovation by young private firms while intra-state deregulation decreased them. Further, banking deregulation primarily impacted riskier explorative innovation by young private firms than the less risky exploitative innovation. In contrast, banking deregulation did not affect public firms and mature private firms that are relatively less dependent on bank financing. These results have important policy implications by demonstrating how financial development, through its impact on innovation by young private firms, can have a first order impact on economic growth.

Keywords: Innovation, Bargaining Power, Banking Deregulation, Explorative vs Exploitative Innovation

JEL Classification: G2, G2, O2

Suggested Citation

Chava, Sudheer and Oettl, Alexander and Subramanian, Ajay and Subramanian, Krishnamurthy, Banking Deregulation, Bargaining Power and Innovation (July 17, 2012). Available at SSRN: https://ssrn.com/abstract=2110455 or http://dx.doi.org/10.2139/ssrn.2110455

Sudheer Chava (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Alexander Oettl

Georgia Institute of Technology - Strategic Management Area ( email )

Atlanta, GA 30332
United States

Ajay Subramanian

Georgia State University ( email )

Depts. of Finance & Risk Management and Insurance
P.O. Box 4050
Atlanta, GA 30303
United States
404-413-7483 (Phone)

HOME PAGE: http://robinson.gsu.edu/profile/ajay-subramanian/

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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