[Professor Marc Deloof of the University of Antwerp, Maurizio La Rocca of the Universita degli Studi della Calabria, and Tom Vanacker of Ghent University recently wrote an article in Entrepreneurship Theory and Practice entitled “Local banking development and the use of debt financing by new firms.” It is available for free through this link. Below, Dr. Deloof explains the inspiration behind this research and reveals additional findings not included in the final publication.
Bank debt represents a critical source of external financing for new firms. At the same time, attracting bank debt remains a major challenge for many new firms. In this study, we ask the following question: How does local banking development—taking into account the presence of different types of banks—affect the use of debt by new firms? We use a unique dataset covering data on 274,271 Italian new firms founded between 2007 and 2013. Italy provides an ideal setting to address this question as it is characterized by significant differences in local banking development, and all Italian firms, including new firms, are required to report detailed financial accounts.
Our results suggest that new firms have a better access to debt in provinces where there are more bank branches. Additionally, the cost of debt for new firms is lower in those provinces. Thus, more bank branches in a province not only make debt more accessible but also cheaper for new firms. Debt financing is also associated with a greater or similar likelihood of survival in provinces with high branch density, compared to provinces with low branch density. This result is inconsistent with the argument that firms receiving loans in provinces with a higher branch density tend to be of poorer quality.
However, we also find that the presence of more foreign banks in a province reduces access to bank debt for new firms. This finding offers an important counter to the often acclaimed beneficial effects of internationalization in banking sectors. Foreign banks “cream skim” whereby they lend only to the most profitable and established local firms. Foreign banks thus make it harder for domestic banks to lend to new firms if the foreign banks consistently take away more profitable business from the domestic banks.
Our results carry important practical implications for entrepreneurs and policy-makers. Particularly entrepreneurs that are setting up new firms that are highly dependent on external debt financing may benefit from selecting locations that are rich in terms of local and national banks. Policy-makers have often been concerned with the consolidation of the local banking system and its impact on the financing of informationally opaque firms, such as new firms. On the one hand, our results are encouraging, in that both branches of local banks and branches of national banks increase the availability of debt financing for new firms. However, when consolidation involves a general reduction in branch density of domestic (local and national) banks this is problematic for new firms. Moreover, our study suggests that a particular concern for policy-makers may be the increasing globalization in the banking industry, particularly in Europe where an increasing integration of financial markets at the E.U. level is actively promoted.
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