Abstract
Complementary to rich existing evidence on bank competition and corporate innovation, this paper aims to investigate the impacts of bank competition on innovation efficiencies, in terms of both R&D input and output at firm level. By acknowledging the role played by information asymmetries in financing innovation, we also examine the moderating effects of information specialization at both industry and firm level on corporate innovation. Analyzing innovation and bank structure data from U.S. between 1992 and 2010, we show novel evidence that increased bank competition improves innovation efficiencies in terms of both R&D input (investment) and output (patents and profits generated by R&D). In addition, we find bank competition has a greater favorable effect on innovation for those firms with more specialized information, such as those operating in an industry with more dispersed productivity growth and those with more concentrated patent types. Overall, our findings support market power hypothesis and banking strategic theory where bank competition improves credit supply to corporate innovation.
Highlights
Recent empirical studies have identified the favorable effects of improved competition in banking markets on corporate innovation (e.g. Amore et al 2013) because of the increased credit supply and lowered costs of finance (Rice and Strahan 2010)
We run a rich set of models with a variety of bank competition measures (e.g. Hirschman Index (HHI), Branch Density, H), model specifications (e.g. OLS, 2SLS, Poisson) and sampling approaches
12 To justify that, in the presence of alternative financing sources, that the favorable effects of bank competition on corporate innovation would long hold for both R&D-intensive firms and others, we re-test our baseline specifications by grouping sample firms according to the industrial R&D intensity, where R&D intensity was calculated as the ratio of total R&D expenditures to sales at a three-digit SIC industry-level
Summary
Recent empirical studies have identified the favorable effects of improved competition in banking markets on corporate innovation (e.g. Amore et al 2013) because of the increased credit supply and lowered costs of finance (Rice and Strahan 2010). Recent empirical studies have identified the favorable effects of improved competition in banking markets on corporate innovation The marginal effects of improved banking competition are 16% greater for those firms with more concentrated patents than for those with dispersed patents This result reveals that, in the presence of information asymmetries when financing corporate innovation, banks benefit from the economies of scale in acquiring more specialized information. This paper differs from prior literature by offering additional evidence on the favorable effects of bank competition on innovation efficiencies. This paper, instead, focuses on the efficiencies of corporate innovation and shows that bank competition improves innovation efficiencies, in terms of the numbers of patents per million dollar R&D investment and the profits generated by R&D spending, which have been neglected by recent empirical studies.
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