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Spillovers in Local Banking Markets

Mark J. Garmaise and Gabriel Natividad ()

Review of Corporate Finance Studies, 2016, vol. 5, issue 2, 139-165

Abstract: How are neighboring firms affected when a bank learns more about a given firm? We analyze exchange-rate-induced movements of Peruvian firms across a threshold that governs their regulatory treatment by banks. Firms that cross the threshold supply more information to their banks and experience a substantial increase in financing. We find positive spillover effects: the neighbors of the above-threshold firms also experience increased financing. These spillovers are confined to neighbors sharing a bank, and the performance of new loans to these neighbors improves, suggesting that the bank has become better informed about other local firms.

Date: 2016
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