Tuesday, December 7, 2021

Banks' Market Power, Access to Finance, and Leverage

Banks' Market Power, Access to Finance, and Leverage

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Francesco D'Acunto

Boston College

Date Written: May 14, 2021


How does lending-market competitiveness affect new firms' financing? Using a unique US representative panel of new firms, we document that in more concentrated local lending markets: (i) new firms are less likely to access credit; (ii) new firms have lower leverage; and (iii) the best performing firms are more severely affected by reduced debt financing. We develop a contingent-claims model with monopolistically competitive banks that rationalizes these facts and shows how credit-market conditions determine loan fees and concentration. Our findings highlight banks' market power as a channel through which the financial sector influences firms' development and, hence, economic growth.


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