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Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship

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Author Info
William Kerr () (Harvard Business School, Entrepreneurial Management Unit)
Ramana Nanda () (Harvard Business School, Entrepreneurial Management Unit)

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Abstract

We study how US branch-banking deregulations affected the entry and exit of firms in the non-financial sector using establishment-level data from the US Census Bureau's Longitudinal Business Database. The comprehensive micro-data allow us to study how the entry rate, the distribution of entry sizes, and survival rates for firms responded to changes in banking competition. We also distinguish the relative effect of the policy reforms on the entry of startups versus facility expansions by existing firms. We find that the deregulations reduced financing constraints, particularly among small startups, and improved ex ante allocative efficiency across the entire firm-size distribution. However, the US deregulations also led to a dramatic increase in 'churning' at the lower end of the size distribution, where new startups fail within the first three years following entry. This churning emphasizes a new mechanism through which financial sector reforms impact product markets. It is not exclusively better ex ante allocation of capital to qualified projects that causes creative destruction; rather banking deregulations can also 'democratize' entry by allowing many more startups to be founded. The vast majority of these new entrants fail along the way, but a few survive ex post to displace incumbents.

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Publisher Info
Paper provided by Harvard Business School in its series Working Papers with number 07-033.

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Length: 41 pages
Date of creation: Dec 2006
Date of revision: Dec 2007
Handle: RePEc:hbs:wpaper:07-033

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Related research
Keywords: banking financial constraints entrepreneurship entry exit creative destruction growth deregulation.

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ramana Nanda, 2008. "Cost of External Finance and Selection into Entrepreneurship," Working Papers 08-047, Harvard Business School. [Downloadable!]
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