Bank Entry Mode, Labor Market Flexibility and Economic Activity

In this paper, I investigate whether information accessibility in the target market influences the mode in which out-of-state banks enter the new market following the U.S. interstate banking deregulation and consequently affects local economic activity. I exploit heterogeneity in legal enforcement of non-compete covenants across states and over time as exogenous variations in the key channel through which an out-of-state bank could gain access to local information: the mobility of local incumbent bank employees. The findings show that banks enter new markets by establishing new branches after the relaxation of non-compete enforcement in the target market, while they enter by acquiring incumbent banks’ branches after the enforcement becomes restrictive in the target market. Interestingly, only bank entries via new branches significantly increase bank competition, improve the availability of credit to small businesses, and facilitate economic growth. The findings highlight the critical role of labor market flexibility in influencing financial development and economic growth.