Effects of bank competition on life-cycle dynamics of non- financial firms Nicola Cetorelli Financial Intermediation Function Research and Statistics Group Federal Reserve Bank of New York The research in this paper was conducted while the author was Special Sworn Status researcher of the U.S. Census Bureau at the center for Economic Studies. Research results and conclusions expressed are those of the author and do not necessarily reflect the views of the Census Bureau. This paper has been screened to insure that no confidential data are revealed. Fundamental question What is the role of bank competition for the real economy? Important follow-up to previous question: does banking matter for economic growth? Dust settled on this question. Now focus is on how/why it matters Why is this important? Interesting theoretical debate More bank competition → more credit available → more entry, growth, etc. More competition → less incentive to develop lending relationships → → less credit (especially younger firms) Why is this important? Another way to put it: More bank competition may increase quantity of credit available but at a cost of diminished quality (diminished allocational efficiency). What do we know? More bank competition : More entry More growth Smaller average firm size Size distribution shifting to the left What do we know? More bank competition has heterogeneous impact across industrial sectors More bank competition has heterogeneous impact across firms within a sector (small and large, young and old) Still more to learn Approach from Corporate Demography angle Gain insights on industries using micro lenses: Understanding processes of organizational founding, growth, decline, transformation and mortality Why? Refinement of theoretical conjectures More competition more entry. But then? Perhaps true more bank competition, less screening, more bad types in, worse capital allocation Hence, more entry, but higher mortality of younger firms Why? Refinement of theoretical conjectures Also, more bank competition, perhaps change in whole “types” distribution: if easier credit available, new organizations can be founded with weaker “gene pool”. Obsolescence of incumbents: under new environments, firms established prior to bank deregulation have harder time to adjust, hence more frail. Why? Refinement of theoretical conjectures Diminished senescence: more bank competition, weaker lending relationships, diminished chance for weak, decaying firms to be kept alive. More competition for credit favors a healthy process of creative destruction in industries. What I do Study impact of deregulation of state-specific branching restrictions in the United States. Bulk of deregulation occurs between 1970 and 1994. Much evidence that removal of restrictions significantly improved bank competition. What I do Main question: How did bank deregulation affect the vital rates of non-financial enterprises? Results Bank deregulation had pervasive, structural impact on life-cycle dynamics of non-financial industries. Change can be defined as “environmental imprinting”. Data Longitudinal Business Dataset (U.S. Bureau of the Census). Universe of U.S. business establishments. Panel 1976 – 2005 Total of more than 7,000,000 records for approximately 1,000,000 individual establishments. Unconditional hazard Smoothed hazard estimate .09 .08 .07 .06 .05 0 10 20 30 analysis time .04 Results Unqualified statement: hazard of death is reduced after deregulation Qualified statement: hazard of death of firms born prior to deregulation is reduced after deregulation hazard of death of firms born after deregulation is increased after deregulation Results Unconditional negative duration dependence, but: Duration dependence turns positive for firms born after deregulation. Consistent with hypothesis of reduced senescence. Firms born prior to deregulation display a “thicker skin”. Evidence against hypothesis of liability of obsolescence. Predicted hazard. Firms born before deregulation and surviving after vs. firms born after deregulation .4 Born-after firms .3 .2 born before survival firms .1 0 0 10 20 30 survival time at end of interval p2 p3 Conclusions Bank deregulation has pervasive, structural impact on real economy Deregulation left environmental imprinting Firms born in new regime of “easier” credit (post- dereg) may be more frail Imprinting did not cause obsolescence of incumbents born in previous regime Reduced senescence → healthier life-cycle dynamics Conclusions The normative implications of a change in bank competition are not that straightforward. Ultimately, more bank competition may be indisputably a good thing, leading to a superior equilibrium. But the process to get there may be painful for some.
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