Banks' Market Power, Access to Finance, and Leverage
Posted: 16 Jul 2021 Last revised: 27 Jan 2023
Date Written: May 14, 2021
How does lending-market competitiveness affect new firms' financing? Using a unique US representative panel of new firms, we document that in more concentrated local lending markets: (i) new firms are less likely to access credit; (ii) new firms have lower leverage; and (iii) the best performing firms are more severely affected by reduced debt financing. We develop a contingent-claims model with monopolistically competitive banks that rationalizes these facts and shows how credit-market conditions determine loan fees and concentration. Our findings highlight banks' market power as a channel through which the financial sector influences firms' development and, hence, economic growth.
Keywords: IO and Finance, Bank Competition, Banks' Fees, Capital Structure, Asymmetric Information, Kauffman Firm Survey, Entrepreneurial Finance, Entrepreneurship, Market Segmentation, Economic Growth.
JEL Classification: D82, G21, G32, G34, L26.
Suggested Citation: Suggested Citation