DoesBankingCompetitionAffectInnovation_.pdf
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DoesBankingCompetitionAffectInnovation_.pdf
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JessCornaggiaMcDonoughSchoolofBusinessGeorgetownUniversityjc2394georgetown.edu(812)856-4068YifeiMaoKelleySchoolofBusinessIndianaUniversityyifmaoindiana.edu(812)855-3476XuanTianKelleySchoolofBusinessIndianaUniversitytianxindiana.edu(812)855-3420BrianWolfeKelleySchoolofBusinessIndianaUniversitywolfebaindiana.edu(812)369-5702ThisVersion:
August2013*Wethankananonymousreferee,MatthewBillett,AlexanderBorisov,MichaelFuerst,PhilipStrahan,BillSchwert(theeditor),JasonSturgess,KrishnamurtySubramanian,GregoryUdell,andseminarandconferenceparticipantsatIndianaUniversity,the2013WesternFinanceAssociationmeetings,andthe2012FinancialManagementAssociationmeetingsforhelpfulcomments.Allerrorsbelongtotheauthors.Electroniccopyavailableat:
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AbstractWeexploitthederegulationofinterstatebankbranchinglawstotestwhetherbankingcompetitionaffectsinnovation.Wefindrobustevidencethatbankingcompetitionreducesstate-levelinnovationbypubliccorporationsheadquarteredwithinderegulatingstates.Innovationincreasesamongprivatefirmsthataredependentonexternalfinanceandthathavelimitedaccesstocreditfromlocalbanks.Wearguethatbankingcompetitionenablessmall,innovativefirmstosecurefinancinginsteadofbeingacquiredbypubliccorporations.Therefore,bankingcompetitionreducesthesupplyofinnovativetargets,whichreducestheportionofstate-levelinnovationattributabletopubliccorporations.Overall,theseresultsshedlightontherealeffectsofbankingcompetitionandthedeterminantsofinnovation.JELclassifications:
G21,G28,G34,O16,O31Keywords:
Bankingcompetition,Innovation,Accesstofinance,Externalfinancedependence,Mergersandacquisitions,EconomicgrowthElectroniccopyavailableat:
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/11.IntroductionWhatdrivesinnovation?
Understandingthedeterminantsofinnovationisimportantbecauseinnovationsestablishcompaniescompetitiveadvantages(Porter,1992)andareimportantdriversofeconomicgrowth(Solow,1957).Agrowingliteraturetakesupthistask,documentingpositiveandnegativeempiricallinksbetweeninnovationandvariouscompanyandmarketcharacteristics.However,thisliteraturecontainsfewempiricalstudiesexaminingthelinkbetweencapitalmarketdevelopmentandinnovationoutput.Wecontributetothisnascentliteraturebyexaminingtheeffectsofstate-levelbankingcompetitiononinnovation.Amajorchallengefacingtheempiricalinnovationliteratureisthatinnovationislikelyendogenouswithcompanyandmarketcharacteristics,includingstate-levelbankingcompetition.Thus,acorrelationbetweenbankingcompetitionandinnovationmaytelluslittleaboutthecausaleffectofbankingcompetitiononinnovation.WealleviateendogeneityconcernsbyexploitingthestaggeredderegulationofinterstatebankbranchinglawsintheUnitedStates.TheU.S.CongresspassedtheInterstateBankingandBranchingEfficiencyAct(IBBEA)in1994.Inadditiontoallowingunrestrictedinterstatebanking,theIBBEAlegalizedinterstatebranchingacrosstheU.S.startingin1997.AsRiceandStrahan(2010)explain,“AllowinginterstatebranchingwasthewatershedeventofIBBEA”(page861).RiceandStrahanshowthat,whenstatesrelaxbankbranchingrestrictions,morebankbranchesopenandcompetewithoneanother.Thisincreaseincompetitionexpandstheavailabilityofcreditwithinastateandlowersthecostofcapitaltherein.Weconstructtestsusingthesederegulatoryeventsasplausiblyexogenousincreasesinthesupplyofstate-levelfinance.GiventheeconomiceffectsdocumentedbyRiceandStrahan(2010),weexpectstate-levelinnovationtoincreasefollowingderegulationbecausecompaniesheadquarteredwithinderegulatingstatescouldtakeadvantageofthegreatersupplyoffinancetoincreaseinnovationoutput.Surprisingly,however,wefindrobustevidencethatincreasesinbankingcompetitioncausestatesinnovationoutputstodecline.Wefindthatstatesthatarecompletelyopentointerstatebranchinggenerateatotalof30.8%fewerpatents(i.e.,920fewerpatents)threeyearsafterbranchingderegulationthanstateswiththemostrestrictionsoninterstatebranching.Wefindasimilarresultwhenweusepatentcitationsasaproxyforinnovation:
Statesthatarecompletelyopentointerstatebranchinggeneratepatentsthatreceiveatotalof23.2%fewercitations(i.e.,9,068fewercitations)threeyearsafterbranching2deregulationthanstateswiththemostrestrictionsoninterstatebranching.Theseresultsarerobusttocontrollingforstate-levelandstate-industry-levellaborforceconcentration,bankingderegulatoryeventsthatprecedeIBBEA,statefixedeffects,andyearfixedeffects.Togainaclearerunderstandingofthisresult,wedecomposestate-levelpatentsintopatentsproducedbypubliccorporationsandprivatefirms.1Privatefirmscouldbemoresensitivetolocalbankingconditionsthanpubliccorporations,sotheeffectsofstate-levelbankingcompetitioncouldbedifferentforthesetwogroups.Indeed,wefindtheoverallnegativeeffectofderegulatoryeventsonstate-levelinnovationisdrivenbycorporationsheadquarteredwithinderegulatingstates.Incontrast,relativetocorporations,privatefirmsexperienceincreasesininnovationoutputfollowingderegulatoryevents.(Wefindnodirecteffectofderegulationonprivatefirmsinnovationoutputs.)Thesefindingssupportthenotionthatsmall,privatefirmstakeadvantageoftheimprovedcreditconditionstofinanceinnovativeprojects.Althoughthestaggeredderegulationofinterstatebankbranchinglawsprovideexogenouschangestobankingcompetition,KrosznerandStrahan(1999)arguethatstate-levelfactorsthatmanifestdifferentlyacrossstatescouldhaveaffectedthetimingofderegulationindifferentstates.Therefore,itispossiblethatourresultsaredrivenbyreversecausality,wherebydifferencesininnovationintensitiesacrossstatestriggeredderegulation.WeemploythemethodologyofBertrandandMullainathan(2003)toaddressthisconcern.Weexaminethedynamicsofinnovationsurroundingthederegulatoryeventsandwefindnopriortrendininnovationoutput.Thisfindingindicatesreversecausalitydoesnotexplainourmainresults.Anotherpotentialexplanationforourresultsisthatanomittedvariablecoincidingwithbranchingderegulationcouldbethetrueunderlyingcauseofchangesininnovation.Ifthisisthecase,thenthechangesininnovationweattributetobranchingderegulationreflectmereassociationsratherthanacausaleffect.Ourbaselineidentificationstrategyemploysshocksthataffectdifferentstatesatdifferenttimes.Itisunlikelythatanomittedvariableunrelatedtobranchingderegulationwouldfluctuateeverytime(orevenmostofthetimes)aderegulatoryeventoccurs.Therefore,ourstrategyofusingmultipleshocksduetostaggeredbankingderegulationacrossstatesmitigatestheomittedvariablesconcern.1Toaidindistinction,weusetheword“corporation”throughouttheremainderofthepapertodesignateCompustatreportedentities.Wereservetheword“firm”forprivatefirmswhosestocksarenotlistedonstockexchanges.Weusetheword“company”asageneraltermforeitherpubliccorporationsorprivatefirms.3Still,weaddressthispossibilitybyconductingplacebotests.WebeginbyobtaininganempiricaldistributionofyearswhenstatesderegulatedfromRiceandStrahan(2010).Next,werandomlyassignstatesintoeachofthesederegulationyears(withoutreplacement)followingtheempiricaldistribution.Thisapproachmaintainsthedistributionofderegulatoryyearsfromourbaselinespecification,butitdisruptstheproperassignmentofderegulationyearstostates.Therefore,ifanunobservableshockoccursatapproximatelythesametimeasthederegulationeventsinthemid-1990s,itshouldstillresideinthetestingframework,andthushaveanopportunitytodrivetheresults.However,ifnosuchshockexists,thenourincorrectassignmentsofderegulatoryyearstostatesshouldweakenourresultswhenwere-estimatethebaselinetests.Indeed,wefindthesefalselyassumedderegulatoryeventshavenoeffectoninnovation.Thesenon-resultscorroboratethenotionthatthepapersmainresultsarenotdrivenbyanomittedvariable.AfterdemonstratingthatthereisanaggregatedecreaseinpatentsandpatentcitationsfollowingincreasedbankingcompetitionfromtheIBBEA,weexaminethreepossiblechannelstoexplainthisresult.First,wetestwhethercompaniesexternalfinancedependenceaffectsthewaytheirinnovationoutputsrespondtochangesinstate-levelbankingcompetition.Weexpectthatbankingcompetitionrelaxesfinancingconstraintsforprivatefirms,mainlyinexternal-finance-dependentindustries.Therefore,theseprivatefirmsshouldexperienceincreasesininnovationoutput.Thisispreciselywhatwefind.WeusethemeasureofexternalfinancedependencedevelopedbyDuchin,Ozbas,andSensoy(2010)andfindexternal-finance-dependentprivatefirmslocatedinstatesthatarecompletelyopentointerstatebranchinggenerateatotalof7.6%morepatentsand6.4%morecitationsthreeyearsafterbranchingderegulationthanfirmsinstateswiththemostrestrictionsoninterstatebranching.Thisresultisrobusttoavarietyofalternativeproxiesforexternalfinancedependence.Wepartitionthedatabycompanysize,age,bankdependencefollowingAcharya,ImbsandSturgess(2011)andbytheSAindexfollowingHadlockandPierce(2010),andweobservequalitativelysimilarresults.Incontrast,weobservenoeffectoranegativeeffectofbankingderegulationonprivatefirmswithbelow-mediandependenceonexternalfinance.Second,companiesbankingrelationshipspriortoderegulatoryeventsprovideanotherwaytot
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