Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets

51 Pages Posted: 24 Feb 2004  

Nicola Cetorelli

Federal Reserve Bank of New York

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2004

Abstract

This paper tests how competition in local U.S. banking markets affects the market structure of non-financial sectors. Theory offers competing hypotheses about how competition ought to influence firm entry and access to bank credit by mature firms. Using data on U.S. local markets for banking and non-financial sectors, we find that more vigorous banking competition - that is, lower concentration and looser restrictions on geographical expansion - is associated with more firms in operation and with a smaller average firm size. In fact, the whole firm-size distribution shifts toward the origin as our measures of banking competition increase. Because we exploit data at the industry level, we are able to control for alternative (omitted) variables that may drive market structure both within and outside banking by exploiting differential reliance on bank finance across industrial sectors.

Suggested Citation

Cetorelli, Nicola and Strahan, Philip E., Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets (January 2004). FRB of Chicago Working Paper No. 2004-04. Available at SSRN: https://ssrn.com/abstract=506002 or http://dx.doi.org/10.2139/ssrn.506002

Nicola Cetorelli (Contact Author)

Federal Reserve Bank of New York ( email )

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New York, NY 10045
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HOME PAGE: http://nyfedeconomists.org/cetorelli/

Philip E. Strahan

Boston College - Department of Finance ( email )

Carroll School of Management
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Chestnut Hill, MA 02467-3808
United States
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617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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