EconPapers    
Economics at your fingertips  
 

Bank market power and SME financing constraints

Santiago Carbo-Valverde, Francisco Rodriguez-Fernandez and Gregory Udell ()
Authors registered in the RePEc Author Service: Santiago Carbo Valverde () and Francisco Rodríguez Fernández ()

No 1022, Proceedings from Federal Reserve Bank of Chicago

Abstract: Theoretical models of lending and industrial organization theory predict that firm access to credit depends critically on bank market structure. However, empirical studies offer mixed results. Some studies find that higher concentration is associated with higher credit availability consistent with the information hypothesis that less competitive banks have more incentive to invest in soft information. Other empirical studies, however, find support for the market power hypothesis that credit rationing is higher in less competitive bank markets. This study tests these two competing hypotheses by employing for the first time a competition indicator from the Industrial Organization literature ? the Lerner index ? as an alternative to traditional measures of concentration. We test the information and the market power hypotheses using alternative measures and firm borrowing constraints. We find that the results are sensitive to the choice between IO margins and traditional concentration measures. In particular, the HHI seems to support the information hypothesis while the Lerner index supports the market power hypothesis. The Lerner index, however, is found to be a more consistent indicator of market power across different measures of financing constraints. Moreover, the Lerner index is found to exhibit the larger marginal effect on the probability that a firm is financially constrained among a large set of firm level, bank market and environmental control variables. Our results are robust to alternative measures of financial constraints and cast doubt on the validity of relying on concentration measures as proxies of competition in corporate lending relationships.

Keywords: Financial institutions; Banking market (search for similar items in EconPapers)
Pages: 143-163
Date: 2006
References: Add references at CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Bank Market Power and SME Financing Constraints (2009) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhpr:1022

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Proceedings from Federal Reserve Bank of Chicago Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2020-10-04
Handle: RePEc:fip:fedhpr:1022