Unintended Side Effects: Stress Tests, Entrepreneurship, and Innovation
57 Pages Posted: 17 May 2019 Last revised: 15 May 2020
Date Written: May 15, 2020
This paper shows that post-crisis stress tests have negative side effects on entrepreneurship and innovation at young firms. Banks subject to stress tests 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 during the recovery 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. where the reduction in credit hits hardest. Counties with higher exposure also see a decline in patent applications by young firms. I provide suggestive evidence that the decline in credit negatively affects labor productivity, reflecting young firms’ disproportionate contribution to growth.
Keywords: stress tests, small business lending, entrepreneurship, innovation, productivity slowdown
JEL Classification: G20, G21, L26
Suggested Citation: Suggested Citation