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The influence of bank branch closure on entrepreneurship sustainability

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  • Sin Tian Ho, Cynthia

    (Department of Real Estate and Construction Management, Royal Institute of Technology)

  • Berggren, Björn

    (Department of Real Estate and Construction Management, Royal Institute of Technology)

Abstract

We study the influence of bank branch closure on new firm formation in Sweden, with a panel database that captures the geographical locations of all the Swedish bank branches from 2000 to 2013. Using spatial econometric analysis at a municipal level, we show that bank proximity to firms is vital for entrepreneurship to thrive and sustain in Sweden. From the Fixed-Effects spatial models, the increase in distance to the banks due to bank branch closure is shown to affect new firm formation negatively. The further a firm is located away from the bank, the higher the monitoring cost is for the banks. The increase in distance also results in an increase in information asymmetries because of the banks’ eroded ability to collect soft information about the borrower firm. Due to high risks associated with the lack of information and uncertainty, banks might not be as willing to loan money to a distant firm compared to a nearby firm. Furthermore, the presence of neighbourhood spillover effects is evidenced through the Moran’s I statistics, which means that the omission of spatial effects in the analysis would have resulted in biased estimates.

Suggested Citation

  • Sin Tian Ho, Cynthia & Berggren, Björn, 2019. "The influence of bank branch closure on entrepreneurship sustainability," Working Paper Series 19/7, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    • Handle: RePEc:hhs:kthrec:2019_007
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    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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