Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-15T09:16:46.307Z Has data issue: false hasContentIssue false
  • English
  • Français

Bank Geographic Diversification and Corporate Innovation: Evidence from the Lending Channel

Published online by Cambridge University Press:  18 February 2020

Saiying Deng Open the ORCID record for Saiying Deng [Opens in a new window] ,
Connie X. Mao Open the ORCID record for Connie X. Mao [Opens in a new window]  and
Cong Xia
Saiying Deng*
Affiliation:
Deng, sdeng4@kent.edu, Kent State University College of Business Administration
Connie X. Mao
Affiliation:
Mao, cmao@temple.edu, Temple University Fox School of Business
Cong Xia
Affiliation:
Xia, xiacong@cufe.edu.cn, Central University of Finance and Economics
*
Deng (corresponding author), sdeng4@kent.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

By integrating staggered interstate banking deregulation into a gravity model following Goetz, Laeven, and Levine (2013), (2016), we construct a time-varying, bank-specific instrument for geographic diversification and investigate its causal effect on corporate innovation via the lending channel. We find that bank geographic diversification spurs corporate innovation and enhances the economic value of innovation. We identify relaxing debt covenants and alleviating borrowers’ financial constraints as the two underlying mechanisms explaining the documented effects. Moreover, by offering lenient covenants, geographically diversified banks provide greater financial and operational flexibility to borrowing firms, enabling them to engage in future mergers and acquisitions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 3 , May 2021 , pp. 1065 - 1096
Copyright
© Michael G. Foster School of Business, University of Washington 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

We are grateful to Jarrad Harford (the editor) and an anonymous reviewer for their numerous insightful and constructive comments and suggestions. We also thank Simone Lenzu (discussant) and Elizabeth Cooperman (discussant); participants at the 2019 Financial Intermediation Research Society Conference and the 2018 Financial Management Association Annual Meeting; and seminar participants at Kent State University, Southern Illinois University (SIU), and Willamette University for their helpful comments and discussions. This study was partially conducted while Saiying Deng and Cong Xia were at SIU. They gratefully acknowledge all the financial support from SIU. All errors are solely our own.

References

Amel, D. F. “State Laws Affecting the Geographic Expansion of Commercial Banks.” Staff Report, Board of Governors of the Federal Reserve System (1993).Google Scholar
Amore, M. D.; Schneider, C.; and Žaldokas, A.. “Credit Supply and Corporate Innovation.” Journal of Financial Economics, 109 (2013), 835–855.Google Scholar
Atanassov, J. “Arm’s Length Financing and Innovation: Evidence from Publicly Traded Firms.” Management Science, 62 (2016), 128–155.Google Scholar
Benfratello, L.; Schiantarelli, F.; and Sembenelli, A.. “Banks and Innovation: Microeconometric Evidence on Italian Firms.” Journal of Financial Economics, 90 (2008), 197–217.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.Google Scholar
Bonaime, A.; Gulen, H.; and Ion, M.. “Does Policy Uncertainty Affect Mergers and Acquisitions.” Journal of Financial Economics, 129 (2018), 531–558.CrossRefGoogle Scholar
Bradley, M., and Roberts, M. R.. “The Structure and Pricing of Corporate Debt Covenants.” Quarterly Journal of Finance, 5 (2015), 1550001.Google Scholar
Cerqueiro, G.; Hegde, D.; Penas, M. F.; and Seamans, R. C.. “Debtor Rights, Credit Supply, and Innovation.” Management Science, 63 (2017), 3311–3327.CrossRefGoogle Scholar
Chang, X.; Chen, Y.; Wang, S. Q.; Zhang, K.; and Zhang, W.. “Credit Default Swaps and Corporate Innovation.” Journal of Financial Economics, 134 (2019), 474–500.Google Scholar
Chava, S.; Oettl, A.; Subramanian, A.; and Subramanian, K. V.. “Banking Deregulation and Innovation.” Journal of Financial Economics, 109 (2013), 759–774.CrossRefGoogle Scholar
Chava, S., and Roberts, M. R.. “How Does Financing Impact Investment? The Role of Debt Covenants.” Journal of Finance, 63 (2008), 2085–2121.Google Scholar
Chen, Q., and Vashishtha, R.. “The Effects of Bank Mergers on Corporate Information Disclosure.” Journal of Accounting and Economics, 64 (2017), 56–77.Google Scholar
Christensen, H. B., and Nikolaev, V. V.. “Capital versus Performance Covenants in Debt Contracts.” Journal of Accounting Research, 50 (2012), 75–116.CrossRefGoogle Scholar
Cornaggia, J.; Cornaggia, K. J.; and Israelsen, R. D.. “Credit Ratings and the Cost of Municipal Financing.” Review of Financial Studies, 31 (2018), 2038–2079.Google Scholar
Cornaggia, J.; Kaviani, M. S.; and Maleki, H.. “The Real Effects of Bank Competition: Evidence from Corporate Bankruptcies.” Working Paper, Pennsylvania State University (2019).Google Scholar
Cornaggia, J., and Li, J. Y.. “The Value of Access to Finance: Evidence from M&As.” Journal of Financial Economics, 131 (2019), 232–250.Google Scholar
Cornaggia, J.; Mao, Y.; Tian, X.; and Wolfe, B.. “Does Banking Competition Affect Innovation.” Journal of Financial Economics, 115 (2015), 189–209.Google Scholar
Demiroglu, C., and James, C. M.. “The Information Content of Bank Loan Covenants.” Review of Financial Studies, 23 (2010), 3700–3737.CrossRefGoogle Scholar
Deng, S.; Willis, R. H.; and Xu, L.. “Shareholder Litigation, Reputational Loss, and Bank Loan Contracting.” Journal of Financial and Quantitative Analysis, 49 (2014), 1101–1132.CrossRefGoogle Scholar
Dichev, I. D., and Skinner, D. J.. “Large-Sample Evidence on the Debt Covenant Hypothesis.” Journal of Accounting Research, 40 (2002), 1091–1123.CrossRefGoogle Scholar
Fang, V. W.; Tian, X.; and Tice, S.. “Does Stock Liquidity Enhance or Impede Firm Innovation.” Journal of Finance, 69 (2014), 2085–2125.CrossRefGoogle Scholar
Frankel, J. A., and Romer, D. H.. “Does Trade Cause Growth.” American Economic Review, 89 (1999), 379–399.Google Scholar
Goetz, M. R.; Laeven, L.; and Levine, R.. “Identifying the Valuation Effects and Agency Costs of Corporate Diversification: Evidence from the Geographic Diversification of US Banks.” Review of Financial Studies, 26 (2013), 1787–1823.Google Scholar
Goetz, M. R.; Laeven, L.; and Levine, R.. “Does the Geographic Expansion of Banks Reduce Risk.” Journal of Financial Economics, 120 (2016), 346–362.Google Scholar
Gopalan, R.; Gormley, T. A.; and Kalda, A.. “It’s Not So Bad: Director Bankruptcy Experience and Corporate Risk Taking.” Working Paper, Kelley School of Business (2019).Google Scholar
Gormley, T. A., and Matsa, D. A.. “Growing out of Trouble? Corporate Responses to Liability Risk.” Review of Financial Studies, 24 (2011), 2781–2821.Google Scholar
Gu, Y.; Mao, C. X.; and Tian, X.. “Banks’ Interventions and Firms’ Innovation: Evidence from Debt Covenant Violations.” Journal of Law and Economics, 60 (2017), 637–671.Google Scholar
Hadlock, C. J., and Pierce, J. R.. “New Evidence on Measuring Financial Constraints: Moving beyond the KZ Index.” Review of Financial Studies, 23 (2010), 1909–1940.CrossRefGoogle Scholar
Hall, B. H.; Jaffe, A. B.; and Trajtenberg, M.. “The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools.” Working Paper, National Bureau of Economic Research (2001).Google Scholar
Hall, B. H.; Jaffe, A. B.; and Trajtenberg, M.. “Market Value and Patent Citations.” RAND Journal of Economics, 36 (2005), 16–38.Google Scholar
Helpman, E.; Melitz, M.; and Rubinstein, Y.. “Estimating Trade Flows: Trading Partners and Trading Volumes.” Quarterly Journal of Economics, 123 (2008), 441–487.CrossRefGoogle Scholar
Hombert, J., and Matray, A.. “The Real Effects of Lending Relationships on Innovative Firms and Inventor Mobility.” Review of Financial Studies, 30 (2017), 2413–2445.CrossRefGoogle Scholar
Jayaratne, J., and Strahan, P. E.. “The Finance-Growth Nexus: Evidence from Bank Branch Deregulation.” Quarterly Journal of Economics, 111 (1996), 639–670.Google Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Kahan, M., and Yermack, D.. “Investment Opportunities and the Design of Debt Securities.” Journal of Law Economics and Organization, 14 (1998), 136–151.Google Scholar
Kaplan, S. N., and Zingales, L.. “Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints.” Quarterly Journal of Economics, 112 (1997), 169–215.CrossRefGoogle Scholar
Kogan, L.; Papanikolaou, D.; Seru, A.; and Stoffman, N.. “Technological Innovation, Resource Allocation, and Growth.” Quarterly Journal of Economics, 132 (2017), 665–712.Google Scholar
Kroszner, R. S., and Strahan, P. E.. “What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions.” Quarterly Journal of Economics, 114 (1999), 1437–1467.CrossRefGoogle Scholar
Mao, C. X., and Zhang, C.. “Managerial Risk-Taking Incentive and Firm Innovation: Evidence from FAS 123R.” Journal of Financial and Quantitative Analysis, 53 (2018), 867–898.Google Scholar
Maskell, P., and Malmberg, A.. “Localised Learning and Industrial Competitiveness.” Cambridge Journal of Economics, 23 (1999), 167–185.Google Scholar
Matsusaka, J. G. “Corporate Diversification, Value Maximization, and Organizational Capabilities.” Journal of Business, 74 (2001), 409–431.Google Scholar
Murfin, J. “The Supply-Side Determinants of Loan Contract Strictness.” Journal of Finance, 67 (2012), 1565–1601.Google Scholar
Nini, G.; Smith, D. C.; and Sufi, A.. “Creditor Control Rights and Firm Investment Policy.” Journal of Financial Economics, 92 (2009), 400–420.Google Scholar
Nini, G.; Smith, D. C.; and Sufi, A.. “Creditor Control Rights, Corporate Governance, and Firm Value.” Review of Financial Studies, 25 (2012), 1713–1761.Google Scholar
Papke, L. E., and Wooldridge, J. M.. “Econometric Methods for Fractional Response Variables with an Application to 401(k) Plan Participation Rates.” Journal of Applied Econometrics, 11 (1996), 619–632.3.0.CO;2-1>CrossRefGoogle Scholar
Papke, L. E., and Wooldridge, J. M.. “Panel Data Methods for Fractional Response Variables with an Application to Test Pass Rates.” Journal of Econometrics, 145 (2008), 121–133.Google Scholar
Rice, T., and Strahan, P. E.. “Does Credit Competition Affect Small-Firm Finance.” Journal of Finance, 65 (2010), 861–889.CrossRefGoogle Scholar
Roberts, M. R., and Sufi, A.. “Control Rights and Capital Structure: An Empirical Investigation.” Journal of Finance, 64 (2009a), 1657–1695.CrossRefGoogle Scholar
Roberts, M. R., and Sufi, A.. “Renegotiation of Financial Contracts: Evidence from Private Credit Agreements.” Journal of Financial Economics, 93 (2009b), 159–184.Google Scholar
Smith, C. W., and Warner, J. B.. “On Financial Contracting: An Analysis of Bond Covenants.” Journal of Financial Economics, 7 (1979), 117–161.CrossRefGoogle Scholar
Solow, R. M. “Technical Change and the Aggregate Production Function.” Review of Economics and Statistics, 39 (1957), 312–320.Google Scholar
Stock, J. H., and Yogo, M.. “Testing for Weak Instruments in Linear IV Regression.” In Identification and Inference for Econometric Models, Andrews, D. W. K. and Stock, J. H., eds. New York, NY: Cambridge University Press (2005).Google Scholar
Sufi, A. “Bank Lines of Credit in Corporate Finance: An Empirical Analysis.” Review of Financial Studies, 22 (2009), 1057–1088.Google Scholar
Wang, Y., and Xia, H.. “Do Lenders Still Monitor When They Can Securitize Loans.” Review of Financial Studies, 27 (2014), 2354–2391.Google Scholar
Whited, T. M., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–559.Google Scholar
Supplementary material: File

Deng et al. Supplementary Materials

Deng et al. Supplementary Materials

Download Deng et al. Supplementary Materials(File)
File 198.8 KB