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Stress Tests, Entrepreneurship, and Innovation*

Sebastian Doerr

Review of Finance, 2021, vol. 25, issue 5, 1609-1637

Abstract: This article shows that postcrisis stress tests have negative effects on entrepreneurship and innovation at young firms. Exploiting unique data on business-related home equity loans in Home Mortgage Disclosure Act, I show that stress-tested banks strongly cut small business loans secured by home equity, an important source of financing for entrepreneurs. Lower credit supply leads to a relative decline in entrepreneurship in counties with higher exposure to stress-tested banks. The decline is stronger in sectors with a higher share of young firms using home equity financing, that is, in which the reduction in credit hits hardest. More-exposed counties also see a decline in young firms’ patent applications as well as labor productivity, reflecting young firms’ disproportionate contribution to growth.

Keywords: Stress tests; Small business lending; Home equity; Entrepreneurship; Innovation (search for similar items in EconPapers)
JEL-codes: G20 G21 L26 (search for similar items in EconPapers)
Date: 2021
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Review of Finance is currently edited by Amit Goyal, Marcin Kacperczyk, Daniel Paravisini, Christine Parlour, Chris Parsons, Joel Peress and Geoffrey Tate

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