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Does banking competition affect innovation?

Author

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  • Cornaggia, Jess
  • Mao, Yifei
  • Tian, Xuan
  • Wolfe, Brian

Abstract

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.

Suggested Citation

  • Cornaggia, Jess & Mao, Yifei & Tian, Xuan & Wolfe, Brian, 2015. "Does banking competition affect innovation?," Journal of Financial Economics, Elsevier, vol. 115(1), pages 189-209.
    • Handle: RePEc:eee:jfinec:v:115:y:2015:i:1:p:189-209
    DOI: 10.1016/j.jfineco.2014.09.001
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    More about this item

    Keywords

    Banking competition; Innovation; Access to finance; Mergers and acquisitions;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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