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Does banking competition affect innovation?

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Listed:
  • 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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    Cited by:

    1. Ying Wang & Jing Zhao, 2015. "Hedge Funds and Corporate Innovation," Financial Management, Financial Management Association International, vol. 44(2), pages 353-385, June.
    2. repec:eee:enepol:v:111:y:2017:i:c:p:403-413 is not listed on IDEAS
    3. Giebel, Marek & Kraft, Kornelius, 2018. "Bank credit supply and firm innovation," ZEW Discussion Papers 18-011, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    4. Caroline Flammer & Aleksandra Kacperczyk, 2016. "The Impact of Stakeholder Orientation on Innovation: Evidence from a Natural Experiment," Management Science, INFORMS, vol. 62(7), pages 1982-2001, July.
    5. Goetz, Martin, 2016. "Competition and bank stability," CFS Working Paper Series 559, Center for Financial Studies (CFS).
    6. repec:spr:ijlaec:v:60:y:2017:i:2:d:10.1007_s41027-017-0097-9 is not listed on IDEAS
    7. Tedi Skiti, 2017. "Entry Barriers and Technological Innovation in Broadband," Working Papers 17-11, NET Institute.
    8. Amore, Mario Daniele & Bennedsen, Morten, 2016. "Corporate governance and green innovation," Journal of Environmental Economics and Management, Elsevier, vol. 75(C), pages 54-72.
    9. Mariana Spatareanu & Vlad Manole & Ali Kabiri, 2017. "Do Bank Shocks Hamper Firms’ Innovation?," Working Papers Rutgers University, Newark 2017-003, Department of Economics, Rutgers University, Newark.
    10. Cho, Chanho & Halford, Joseph T. & Hsu, Scott & Ng, Lilian, 2016. "Do managers matter for corporate innovation?," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 206-229.
    11. Amore, Mario Daniele, 2015. "Companies learning to innovate in recessions," Research Policy, Elsevier, vol. 44(8), pages 1574-1583.
    12. repec:kap:rqfnac:v:49:y:2017:i:4:d:10.1007_s11156-016-0611-z is not listed on IDEAS
    13. Woon Sau Leung & Wei Song & Jie Chen, 2018. "Does Bank Stakeholder Orientation Enhance Financial Stability? Evidence from a Natural Experiment," Working Papers 2018-14, Swansea University, School of Management.
    14. Amore, Mario Daniele & Garofalo, Orsola, 2016. "Executive gender, competitive pressures, and corporate performance," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 308-327.
    15. repec:eee:jfinec:v:124:y:2017:i:2:p:223-243 is not listed on IDEAS
    16. Mihaela Diaconu, 2016. "Determinants of Financing Decisions in Innovative Firms: A Review on Theoretical Backgrounds and Empirical Evidence," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 198-203, February.
    17. Giebel, Marek & Kraft, Kornelius, 2017. "External financing constraints and firm's innovative activities during the financial crisis," ZEW Discussion Papers 17-064, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    18. Mukherjee, Abhiroop & Singh, Manpreet & Žaldokas, Alminas, 2017. "Do corporate taxes hinder innovation?," Journal of Financial Economics, Elsevier, vol. 124(1), pages 195-221.
    19. Hong Zhu & Qi Zhu, 2016. "Mergers and acquisitions by Chinese firms: A review and comparison with other mergers and acquisitions research in the leading journals," Asia Pacific Journal of Management, Springer, vol. 33(4), pages 1107-1149, December.
    20. repec:eee:jfinin:v:32:y:2017:i:c:p:45-59 is not listed on IDEAS
    21. XU Peng, 2017. "Bank-Firm Relationship and Small Business Innovation," Discussion papers 17062, Research Institute of Economy, Trade and Industry (RIETI).
    22. Zhu, Hui & Zhu, Steven X., 2017. "Corporate innovation and economic freedom: Cross-country comparisons," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 50-65.
    23. Pezeshkan, Amir & Smith, Adam & Fainshmidt, Stav & Amini Sedeh, Amirmahmood, 2016. "National business systems and firm innovation: A study of developing economies," Journal of Business Research, Elsevier, vol. 69(11), pages 5413-5418.

    More about this item

    Keywords

    Banking competition; Innovation; Access to finance; Mergers and acquisitions;

    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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