Bank specialisation and corporate innovation

Hans Degryse, Olivier De Jonghe, Leonardo Gambacorta and Cedric Huylebroek

No 1218, BIS Working Papers from Bank for International Settlements

Abstract: Theory offers conflicting predictions on whether and how lenders' sectoral specialization would affect firms' innovation activities. We show that the sign and magnitude of this effect vary with the degree of "asset overhang" across sectors, which is the risk that a new technology has negative spillovers on the value of a bank's legacy loan portfolio. Using both patent data and micro-level innovation survey data, we find that lenders' sectoral specialization improves innovation for firms operating in sectors with low asset overhang, but impedes innovation for firms operating in sectors with high asset overhang. These results hold for two distinct measures of asset overhang and using bank mergers as a source of exogenous variation in bank specialization. We further show that these heterogeneous effects arise through financial contracting. Overall, our findings provide novel insights into the dual facets of bank specialization and, more broadly, the link between banking and innovation.

Keywords: bank specialization; bank lending; corporate innovation; asset overhang; financial frictions (search for similar items in EconPapers)
JEL-codes: G20 L20 O30 (search for similar items in EconPapers)
Date: 2024-10
New Economics Papers: this item is included in nep-ban, nep-pay and nep-sbm
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Working Paper: Bank specialization and corporate innovation (2024)
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