Banks' Market Power, Access to Finance, and Leverage

53 Pages Posted: 16 Jul 2021

See all articles by Maria Cecilia Bustamante

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Francesco D'Acunto

Boston College

Date Written: May 14, 2021

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.

Suggested Citation

Bustamante, Maria Cecilia and D'Acunto, Francesco, Banks' Market Power, Access to Finance, and Leverage (May 14, 2021). Available at SSRN: https://ssrn.com/abstract=3886422 or http://dx.doi.org/10.2139/ssrn.3886422

Maria Cecilia Bustamante (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

HOME PAGE: http://https://sites.google.com/a/rhsmith.umd.edu/mcbustam/?pli=1

Francesco D'Acunto

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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