Thursday, May 24, 2012
Posted by D. Daniel Sokol
Jess Cornaggia, Indiana University Bloomington - Kelley School of Business, Xuan Tian, Indiana University - Kelley School of Business and Brian Wolfe, Indiana University ask Does Banking Competition Affect Corporate Innovation?
ABSTRACT: We exploit the deregulation of interstate bank branching laws to test whether banking competition affects corporate innovation. We find robust evidence that banking competition in corporations’ headquarter states causes corporations to produce fewer patents and patents with fewer citations. One explanation for this negative relation is that banking competition could enable small, innovative firms to secure bank financing at a lower cost instead of being acquired by corporations. Consistent with this hypothesis, we find evidence that banking competition reduces the supply of innovative targets, generating an apparent reduction in corporate innovation. Overall, these results uncover a surprising effect of banking competition and shed light on the determinants of corporate innovation.