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Stress Tests, Entrepreneurship, and Innovation
[Lending implications of U.S. bank stress tests: costs or benefits?]

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  • Sebastian Doerr

Abstract

This article shows that postcrisis stress tests have negative effects on entrepreneurship and innovation at young firms. Exploiting unique data on business-related home equity loans in Home Mortgage Disclosure Act, I show that stress-tested banks strongly cut small business loans secured by home equity, an important source of financing for entrepreneurs. Lower credit supply leads to a relative decline in entrepreneurship in counties with higher exposure to stress-tested banks. The decline is stronger in sectors with a higher share of young firms using home equity financing, that is, in which the reduction in credit hits hardest. More-exposed counties also see a decline in young firms’ patent applications as well as labor productivity, reflecting young firms’ disproportionate contribution to growth.

Suggested Citation

  • Sebastian Doerr, 2021. "Stress Tests, Entrepreneurship, and Innovation [Lending implications of U.S. bank stress tests: costs or benefits?]," Review of Finance, European Finance Association, vol. 25(5), pages 1609-1637.
    • Handle: RePEc:oup:revfin:v:25:y:2021:i:5:p:1609-1637.
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    File URL: http://hdl.handle.net/10.1093/rof/rfab007
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    Citations

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    Cited by:

    1. Kok, Christoffer & Müller, Carola & Ongena, Steven & Pancaro, Cosimo, 2023. "The disciplining effect of supervisory scrutiny in the EU-wide stress test," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    2. Sebastian Doerr & Thomas Drechsel & Donggyu Lee, 2021. "Income inequality, financial intermediation, and small firms," BIS Working Papers 944, Bank for International Settlements.
    3. Lo, Andrew W. & Thakor, Richard T., 2023. "Financial intermediation and the funding of biomedical innovation: A review," Journal of Financial Intermediation, Elsevier, vol. 54(C).
    4. Drechsel, Thomas & Doerr, Sebastian & Lee, Donggyu, 2022. "Income Inequality and Job Creation," CEPR Discussion Papers 17342, C.E.P.R. Discussion Papers.
    5. Paul Konietschke & Steven Ongena & Aurea Ponte Marques, 2022. "Stress tests and capital requirement disclosures: do they impact banks' lending and risk-taking decisions?," Swiss Finance Institute Research Paper Series 22-60, Swiss Finance Institute.
    6. Anne Beck & Sebastian Doerr, 2023. "The financial origins of regional inequality," BIS Working Papers 1151, Bank for International Settlements.

    More about this item

    Keywords

    Stress tests; Small business lending; Home equity; Entrepreneurship; Innovation;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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