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Credit market competition and the nature of firms

  • Nicola Cetorelli

Empirical studies show that competition in the credit markets has important effects on the entry and growth of firms in nonfinancial industries. This paper explores the hypothesis that the availability of credit at the time of a firm's founding has a profound effect on that firm's nature. I conjecture that in times when financial capital is difficult to obtain, firms will need to be built as relatively solid organizations. However, in an environment of easily available financial capital, firms can be constituted with an intrinsically weaker structure. To test this conjecture, I use confidential data from the U.S. Census Bureau on the entire universe of business establishments in existence over a thirty-year period; I follow the life cycles of those same establishments through a period of regulatory reform during which U.S. states were allowed to remove barriers to entry in the banking industry, a development that resulted in significantly improved credit competition. The evidence confirms my conjecture. Firms constituted in post-reform years are intrinsically frailer than those founded in a more financially constrained environment, while firms of pre-reform vintage do not seem to adapt their nature to an easier credit environment. Credit market competition does lead to more entry and growth of firms, but also to complex dynamics experienced by the population of business organizations.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 366.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:366
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  19. Nicola Cetorelli, 2004. "Real effects of bank competition," Proceedings, Federal Reserve Bank of Cleveland, pages 543-562.
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  23. Ashenfelter, Orley, 2007. "Predicting the quality and prices of Bordeaux wines," Working Papers 37297, American Association of Wine Economists.
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  27. Douglas D. Evanoff & Evren Ors, 2008. "The Competitive Dynamics of Geographic Deregulation in Banking: Implications for Productive Efficiency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 897-928, 08.
  28. Evans, David S., 1986. "Tests of Alternative Theories of Firm Growth," Working Papers 86-36, C.V. Starr Center for Applied Economics, New York University.
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