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To Build or to Buy? The Role of Local Information in Credit Market Development

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  • Teng Wang

    (Board of Governors, Federal Reserve System, Washington, District of Columbia 20551)

Abstract

Exploiting the heterogeneity in legal constraints on local bank employees’ mobility, I show that access to local information influences banks’ modes of expansion. As restrictions on interbank labor mobility are relaxed, banks entering a new market establish branches directly instead of acquiring incumbent branches, resulting in a shift of composition of entrants. The treatment effect is strengthened when information asymmetries between local banks and entrants are severe. Furthermore, I find a surge in the volume and a reduction in the rates of local small business loans originated by surrounding incumbent banks after the entry of outside banks, especially after entrants establish new branches.

Suggested Citation

  • Teng Wang, 2019. "To Build or to Buy? The Role of Local Information in Credit Market Development," Management Science, INFORMS, vol. 65(12), pages 5838-5860, December.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:12:p:5838-5860
    DOI: 10.1287/mnsc.2018.3105
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