enhance the overall performance of the banking industry. We test whether the presence of entry barriers amplifies the negative effect of bank market power on access to finance for financially constrained firms by interacting an index of entry into banking with our external finance dependence measure. Our entry into banking index is taken from Barth et al. (2013) and measures a country’s requirements of entering into banking based on the amount of information required to apply for a banking license. The values of the index of entry into banking range from 0 to 8, with higher values indicating greater stringency. Accordingly, we should expect a negative sign for our interaction variable, i.e. lower stringency is associated with higher value added of financial constrained firms. Results are reported in column 3 (labeled “Bank entry”). While the estimated coefficient is always positive, we do not find a statistically significant impact of entry barriers in the banking sector on growth.

National regulators not only license banks but also specify permissible activities. Countries may restrict banks to a narrow range of activities, or allow them to engage in a broad array. The scope of activities helps define what is meant by a “bank” in a country. The possibility for a bank to diversify its business model and offer a wide array of products and services to firms, especially SMEs, may be beneficial for economic growth. We test this hypothesis by interacting an index of activity restrictions with the external finance dependence index. The index of activity restrictions is from Barth et al. (2013) and measures the degree to which national regulations restrict banks from engaging in securities activities, insurance activities, and real estate activities. The index ranges from 1 to 4, where larger values indicate more restrictions on banks’ activities. Results are reported in column 4 (labeled “Act restr”). For all measures of market power in the banking sector, we find that the degree of restrictions on banks’ activities enter the model with a statistically significant negative sign. This finding clearly indicates that sectors that depend more on external finance are hurt by restrictions imposed on banks’ activities.

The quality and scope of credit information in a country can affect the impact of bank competition on access to finance. The presence of credit information sharing mechanisms such as credit registry or credit bureaus can help overcome adverse selection and moral hazard problems in credit markets (Padilla and Pagano, 2000; Jappelli and Pagano, 2002). Several empirical studies have found that information sharing results in more lending and better access to finance (see Love and Martinez‐Peria, 2014 for a review of the literature). This means that in an environment of reduced information asymmetry bank will have fewer incentives to invest in private information acquisition and therefore less to lose in the presence of higher competition. We test this hypothesis by interacting our measure of external financial dependence with a variable measuring the depth of credit information. The depth of credit information index, taken from the World Bank Doing Business Database, measures rules affecting the scope, accessibility, and quality of credit information available through public or private credit registries. The index ranges from 0 to 8, with higher values indicating the availability of more credit information to facilitate lending decisions. Results, which are reported in column 6 (labeled “Depth credit”), show that the estimated coefficient is positive and significant in all but one specification (the one with 3‐ bank concentration ratio), indicating that there is strong evidence that availability of credit information has positive effects on the growth performance of more financially dependent sectors.

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