Unintended Side Effects: Stress Tests, Entrepreneurship, and Innovation

57 Pages Posted: 17 May 2019 Last revised: 15 May 2020

See all articles by Sebastian Doerr

Sebastian Doerr

Bank for International Settlements

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Date Written: May 15, 2020

Abstract

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

Doerr, Sebastian, Unintended Side Effects: Stress Tests, Entrepreneurship, and Innovation (May 15, 2020). 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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CH-4002 Basel
Switzerland

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