Entrepreneurship and Bank Credit Availability

Authors

  • Sandra E. Black,

  • Philip E. Strahan

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    • Black is Assistant Professor, Department of Economics, University of California at Los Angeles. Strahan is Associate Professor of Finance, Carroll School of Management, Boston College. We thank Rebecca Demsetz, Nicola Cetorelli, Beverly Hirtle, George Kaufman, Marc Saidenberg, Kevin Stiroh, and a very thoughtful referee for comments and David Fiore for his excellent research assistance. We also thank seminar participants at Boston College, the Federal Reserve Bank of New York, University of Illinois, University of Maryland, and MIT.


Abstract

The literature is divided on the expected effects of increased competition and consolidation in the financial sector on the supply of credit to relationship borrowers. This paper tests whether policy changes fostering competition and consolidation in U.S. banking helped or harmed entrepreneurs. We find that the rate of new incorporations increases following deregulation of branching restrictions, and that deregulation reduces the negative effect of concentration on new incorporations. We also find the formation of new incorporations increases as the share of small banks decreases, suggesting that diversification benefits of size outweigh the possible comparative advantage small banks may have in forging relationships.

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