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 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 public corporations. Therefore, banking competition reduces the supply of innovative targets, which reduces the portion of state-level innovation attributable to public corporations. Overall, these results shed light on the real effects of banking competition and the determinants of innovation.
Cornaggia, Jess, Yifei Mao, Xuan Tian, and Brain Wolfe, 2013, Does Banking Competition Affect Innovation? Journal of Financial Economics, forthcoming.
Banking competition, Innovation, Access to finance, External finance dependence, Mergers and acquisitions, Economic growth