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Review of Quantitative Finance and Accounting

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20.02.2018 | Original Research

How local is local? Evidence from bank competition and corporate innovation in U.S.

verfasst von: Lin Tian, Liang Han

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 1/2019

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Abstract

This paper aims to fill in a research gap in the effects of bank competition on corporate innovation. In addition to the evidence on the favorable effects of bank competition on corporate innovation, this paper shows novel evidence on the substitution effects of bank competition in a wider region and neighbor-state to local bank competition in financing corporate innovation activities. In financing innovation, we show ‘how local is local’ depends on the operating scope and information transparency of firms. Local banks have an information advantage over distant banks in financing local businesses and informationally opaque corporate innovation activities. Therefore, improved competition in distant banking markets may have limited ability to substitute the favorable effects of local bank competition in facilitating corporate innovation activities.

Vorheriger Artikel Corporate innovation strategy and disclosure policy

Nächster Artikel The influence of CEO and CFO power on accruals and real earnings management

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Bank customers may undertake additional information costs related to searching information about alternative suppliers. These searching costs may vary directly with the distance between the customer and financial institutions and the degree of heterogeneity in financial services. Providing information to prospective customers can also impose costs on financial institutions in the form of advertising or the costs associated with maintaining relationships with brokers or other agents that interact with potential customers (Brevoort and Wolken 2009).

More recent data on bank market structure are available from FDIC and we find bank market has become less competitive (measured by Panzar–Rosse H Statistics) since financial crisis. Upon availability of more recent data on patent, future research could look into how financial crisis and reduced bank competition affect corporate innovation. We appreciate an anonymous referee for raising this point.

We match NBER patent data with COMPUSTAT sample firms by using a bridge file provided by the NBER database in which GVKEY is the common identifier. For cases in which the corporate headquarter is different from the assignee state, we use the headquarter state of the corporation shown in COMPUSTAT.

We follow existing literature to date patents to the year of application to reflect the signaling effects and weight-average the number for 3 years to mitigate the truncation bias. Please see “Appendix”, Hall et al. (2001, 2005) and Cornaggia et al (2015) for more detail.

The derivation and equilibrium test of H is not reported but available from authors upon request.

The existence of endogeneity of local banking market competition is supported by Wu–Hausman F test (p = 0.0632) and Durbin–Wu–Hausman chi-sq test (p = 0.0225) in our empirical analysis.

The correlation between state average H and state median Tier 1 risk-based capital ratio during 1992–2004 is—0.1718 and is significantly different from zero at the 1% level.

We use median Tier 1 ratio rather than regulatory minimum because banks might be still undercapitalized even they have such a ratio above minimum. To test the validity of the instrument, we conduct additional tests to investigate (1) if there is any relationship between Tier 1 ratio and innovation, (2) if the implementation of Basal Core Principles for Effective Banking Supervision in 1997, on which Tier 1 ratio is based, has any impact on innovation and (3) the robustness of the results by using an alternative instrument, tangible capital ratio. Our results, not reported but available on request, show consistent evidence on the validity of the instrument (Tier 1 ratio) used. We appreciate two anonymous referees for raising this issue.

Apart from venture capital, other nonbank sources of finance may also have impacts on corporate innovation. Our data do not allow us to further investigate such impacts and we call for future research to examine the effects of bank-nonbank competition on corporate innovation. We appreciate an anonymous referee for raising this point.

Concerning the potential bias that is caused by multicollinearity, we exclude the state fixed effects from Eq. (1) since \(H_{jt}\) is defined at state × year level. The identification of β1, therefore, is not solely from within-state variation across time (Chava et al. 2013).

We test the effects of home-state H and neighbour-state H in separate models. This is because the interdependence between \(H_{jt}\) and \(Neigh\_H_{jt}\) may cause a potential multicollinearity problem. In addition, the main purpose of the paper is to investigate whether commercial lending markets in neighbor states can alter the impacts of localized banks (i.e. substitution effects) rather than the spillover of banking competition.

We only measure two clusters in our estimations. The resource based clusters in Porter (2003) are considered as local industries because employment in these industries is located primarily where the needed natural resources are found, although the industries somewhat compete with other domestic or international locations.

We use the same instrument in estimating HHI and the correlation coefficient of state median Tier 1 risk-based capital ratio with HHI is 0.4973 significantly different from zero at a 1% level.

Results are not reported but available from the authors on request.

The estimated results of subsamples are not reported but available from authors on request.

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Titel: How local is local? Evidence from bank competition and corporate innovation in U.S.
verfasst von: Lin Tian
Liang Han
Publikationsdatum: 20.02.2018
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 1/2019
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-018-0710-0

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