Does Banking Competition Affect Innovation?
2013, forthcoming Journal of Financial Economics
Jess Cornaggia, Yifei Mao, Xuan Tian, Brian Wolfe
We exploit the deregulation of interstate bank branching laws to test whether banking competition affects innovation. We find robust evidence that banking competition reduces state-level innovation. This result is driven by public corporations headquartered within deregulating states. Innovation increases among private firms that are dependent on external finance and that have limited access to credit from local banks. We argue that banking competition enables small, innovative firms to secure financing instead of being acquired by corporations. Banking competition reduces the supply of innovative targets, generating an apparent reduction in corporate innovation. Overall, these results shed light on the real effects of banking competition and the determinants of innovation.
Cornaggia, Jess, Yifei Mao, Xuan Tian and Brian Wolfe (2013), "Does Banking Competition Affect Innovation?" Journal of Financial Economics, forthcoming.