Banks' Market Power, Access to Finance, and Leverage

Abstract

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.