Bank Characteristics and Bank Lending to New Firms

Abstract

This paper examines the characteristics of financial institutions that provide financing to new firms using a unique firm-bank match-level dataset of more than 3,000 unlisted small and medium-sized enterprises (SMEs) incorporated in Japan. We employ a within-firm estimator that perfectly controls for unobserved firms’ demand for credit through firm∗time fixed effects. We find that financial institutions with many branches or employees are more likely to provide financing to new firms. We also find that Shinkin banks tend to more aggressively provide loans to these firms than profit-maximizing financial institutions. Moreover, we find that when financial institutions provide financing to new firms from just after their incorporation, the number of stores is more important than the case of lending to such firms in general. Furthermore, we find that financial institutions with high capital adequacy ratios continuously provide loans to the same new firms.