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Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship Author info | Abstract | Publisher info | Download info | Related research | Statistics William Kerr () (Harvard Business School, Entrepreneurial Management Unit)
Ramana Nanda () (Harvard Business School, Entrepreneurial Management Unit)
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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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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 2006Date of revision:
Dec 2007Handle: RePEc:hbs:wpaper:07-033Contact details of provider: Postal: Soldiers Field, Boston, Massachusetts 02163 Phone: 617.495.6000 Web page: http://www.hbs.edu/ More information through EDIRC
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Keywords: banking financial constraints entrepreneurship entry exit creative destruction growth deregulation. Other versions of this item:
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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Ramana Nanda, 2008.
"Cost of External Finance and Selection into Entrepreneurship ,"
Working Papers
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