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

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.