Democratizing entry
Subtitle: banking deregulations, financing constraints, and entrepreneurship
By: William Kerr, Ramana Nanda
Contributors: Nanda, Ramana; Harvard Business School
Edition: 2nd rev.
Series: Working paper / Harvard Business School -- 07-033; Working paper (Harvard Business School) -- 07-033
Publisher: Harvard Business School
Published: 2007
Place of publication: Boston]
Language: eng
Number of pages: 27
Description: We study how US branch banking deregulations affected the entry and exit of firms in the non-financial sector using establishment-level data from the US Census Bureau's Longitudinal Business Database. The comprehensive micro-data allow us to study how the entry rate, the distribution of entry sizes, and survival rates for firms responded to changes in banking competition. We also distinguish the relative effect of the policy reforms on the entry of startups versus facility expansions by existing firms. We find that the deregulations reduced financing constraints, particularly among small startups, and improved allocative efficiency across the entire firm size distribution. However, the US deregulations also led to a dramatic increase in 'churning' at the lower end of the size distribution, where new startups fail within the first three years following entry. This churning emphasizes a new mechanism through which financial sector reforms impact product markets. It is not exclusively better ex ante allocation of capital to qualified projects that causes creative destruction; rather banking deregulations can also 'democratize' entry by allowing many more startups to be founded. The vast majority of these new entrants fail along the way, but a few survive ex post to displace incumbents.
Notes: "12 December 2007"--Added t.p.

First published as: Banking deregulation, financing constraints and entrepreneurship. 16 December 2006. First revision published: 10 July 2007.

Includes bibliographical references.