Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets

Abstract

This paper tests how competition in local U.S. banking markets affects the market structure of non-financial sectors. Theory offers competing hypotheses about how competition ought to influence firm entry and access to bank credit by mature firms. Using data on U.S. local markets for banking and non-financial sectors, we find that more vigorous banking competition - that is, lower concentration and looser restrictions on geographical expansion - is associated with more firms in operation and with a smaller average firm size. In fact, the whole firm-size distribution shifts toward the origin as our measures of banking competition increase. Because we exploit data at the industry level, we are able to control for alternative (omitted) variables that may drive market structure both within and outside banking by exploiting differential reliance on bank finance across industrial sectors.

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