Stress Tests, Entrepreneurship, and Innovation

Review of Finance

36 Pages Posted: 17 May 2019 Last revised: 3 Feb 2021

See all articles by Sebastian Doerr

Sebastian Doerr

Bank for International Settlements

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2021

Abstract

This paper shows that post-crisis stress tests have negative effects on entrepreneurship and innovation at young firms. Exploiting unique data on business-related home equity loans in HMDA, I show that stress tested banks strongly cut small business loans secured by home equity, an important source of financing for entrepreneurs. Lower credit supply leads to a relative decline in entrepreneurship in counties with higher exposure to stress tested banks. The decline is stronger in sectors with a higher share of young firms using home equity financing, i.e., in which the reduction in credit hits hardest. More-exposed counties also see a decline in young firms’ patent applications as well as labor productivity, reflecting young firms’ disproportionate contribution to growth.

Keywords: stress tests, small business lending, home equity, entrepreneurship, innovation

JEL Classification: G20, G21, L26

Suggested Citation

Doerr, Sebastian, Stress Tests, Entrepreneurship, and Innovation (February 1, 2021). Review of Finance, Available at SSRN: https://ssrn.com/abstract=3384006 or http://dx.doi.org/10.2139/ssrn.3384006

Sebastian Doerr (Contact Author)

Bank for International Settlements ( email )

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