Political Uncertainty and the Geographic Allocation of Credit: Evidence from Small Businesses

50 Pages Posted: 12 Dec 2019 Last revised: 25 Jun 2020

See all articles by Geraldo Cerqueiro

Geraldo Cerqueiro

Catolica-Lisbon SBE

Ana Mão-de-Ferro

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

María Fabiana Penas

Universidad Torcuato Di Tella

Date Written: November 22, 2019

Abstract

We investigate how political uncertainty affects the geographic distribution of bank lending to small businesses. Using exogenous variation in gubernatorial elections with binding term limits, we show that political uncertainty causes local banks to increase lending to small firms in the other states where they operate, especially in the wealthier counties. The increase in credit availability in turn leads to an increase in employment growth and net firm creation in those states, especially in sectors that need larger amounts of startup capital. Our results indicate that geographic diversification and financial integration enable banks to sidestep the negative local economic effects of political uncertainty.

Keywords: political uncertainty, banking industry, small firms

JEL Classification: G21, L26, M13

Suggested Citation

Cerqueiro, Geraldo and Mão-de-Ferro, Ana and Penas, María Fabiana, Political Uncertainty and the Geographic Allocation of Credit: Evidence from Small Businesses (November 22, 2019). TILEC Discussion Paper No. DP 2020-001, Available at SSRN: https://ssrn.com/abstract=3492043 or http://dx.doi.org/10.2139/ssrn.3492043

Geraldo Cerqueiro (Contact Author)

Catolica-Lisbon SBE ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Ana Mão-de-Ferro

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
42, Bd du Pont d'Arve
Geneva, CH-1211
Switzerland

María Fabiana Penas

Universidad Torcuato Di Tella ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

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