Business dynamics and credit shocks: Evidence from local markets in Brazil

This study brings together the literature on public banks and business dynamics by showing the reallocating consequences of the exit of public banks in a large emerging economy. We study a financial sector restructuring program in Brazil that privatized regional banks and we consider the relationship between local public credit availability and business dynamics. Our measure of financial restriction is the exits of regional public banks from local markets. Our empirical exercises show that regional public credit operates in the economy through the prevention of job destruction and the exit of establishments. Moreover, our results indicate that shutting down sources of local public credit accelerated the exit rate of establishments, increased the rate of job destruction while also increasing job creation from new establishments. The results are consistent with the interpretation that firms which enjoyed patronage from local banks had to exit the market following the privatization program and new businesses entered establishing relationships with private banks.