Information Disclosure, Finance and Growth. Evidence from an Unbanked Industry in the US

Abstract

This paper uses a unique setting of an unbanked industry with high information costs to study the impact of information dissemination by the government on the future growth. Specifically, the paper studies the US Marijuana industry. Marijuana is considered an illegal drug by Federal law and hence it is significantly costly for the banks and other financial institutions to serve the industry. I exploit the passage of the Cole Memo and a unique information disclosure experiment by Washington state that lowered banking access costs for its marijuana industry compared to other legal marijuana states such as Colorado. This paper uses micro-level panel data and instrumental variable (IV) regression to study the causal impact of information generation and banking access on the growth of the industry. Firm-level analysis shows that access to banking and subsequent sales growth increased following the state official's enforcement visits to the firm's facilities, supporting the claim that information generated through these visits significantly lowered information costs faced by the banking industry. Consistent with the causal effect of information disclosure on banking access, the increase in sales growth is concentrated for single-license firms which are more dependent on external finance as compared to multi-license firms. The results are robust to placebo tests and alternative specifications.