Tuesday, December 7, 2021
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.