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The effect of foreign bank presence on firm entry and exit in transition economies

Olena Havrylchyk

No 11/2011, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

Abstract: This study investigates the impact of foreign bank penetration on firm entry in Central and Eastern Europe. Acquisition of domestic banks by foreign investors has lowered rates of firm creation, decreased the average size of entrants, and increased firm exit in industries with greater informational opacity, while entry of greenfield foreign banks appears to have spurred firm creation and exit. We modify the view in earlier studies that informational opacity equates with firm size, defining opacity in terms of technological characteristics for a given industry. We find the economic significance of foreign bank entry is larger for opaque industries than industries with large shares of small firms. The study provides evidence of increased credit constraints for start-ups in Central and Eastern Europe, which is consistent with the theoretical proposition that the presence of foreign banks exacerbates informational asymmetries. Keywords: Entrepreneurship, Foreign bank entry, Asymmetric information, Credit constraints JEL: E51, G21, M13

JEL-codes: E51 G21 M13 (search for similar items in EconPapers)
Date: 2011-06-17
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Published in Published in Journal of Banking and Finance, Volume 36, Issue 6, June 2012, Pages 1710-1721.

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