Does Credit Competition Affect Small-Firm Finance?




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    • Rice is from the Board of Governors, Division of International Finance, and Strahan is from Boston College, Wharton Financial Institutions Center and NBER. The views expressed in this paper are solely those of the authors and should not be interpreted as reflecting the views of the Board of Governors or the staff of the Federal Reserve System. We thank Ron Borzekowski, Courtney Carter, Diana Hancock, Traci Mach, Richard Porter and John Wolken for providing data and research support, and acknowledge the helpful comments of Robert DeYoung, Campbell Harvey, Mitchell Petersen, the associate editor, an anonymous referee, and seminar participants at the Federal Reserve Bank of Chicago, the Federal Reserve Board, the 2008 Federal Reserve Bank of Chicago Conference on Bank Structure and Competition, and the 2009 American Finance Association Meetings.


While relaxation of geographical restrictions on bank expansion permitted banking organizations to expand across state lines, it allowed states to erect barriers to branch expansion. These differences in states' branching restrictions affect credit supply. In states more open to branching, small firms borrow at interest rates 80 to 100 basis points lower than firms operating in less open states. Firms in open states also are more likely to borrow from banks. Despite this evidence that interstate branch openness expands credit supply, we find no effect of variation in state restrictions on branching on the amount that small firms borrow.