Most of the existing empirical studies on the link between competition and access to finance use concentration measures as proxies for competition and yield mixed results. Using data from the US, Petersen and Rajan (1994, 1995) find that SMEs are more likely to obtain financing when credit markets are concentrated.<sup>4</sup> Similarly, using a survey dataset of German manufacturing firms, Fischer (2000) finds that more concentration leads to more information acquisition and greater credit availability. On the other hand, using enterprise survey data for 74 countries, Beck, Demirguc-Kunt, and Maksimovic (2004) find that in more concentrated banking sectors firms of all sizes face higher financing obstacles and the impact of concentration decreases with firm size. Chong, Lu, and Ongena (2012) also find a positive association between concentration and credit constraints, using a survey on the financing of Chinese SMEs combined with detailed bank branch information.<sup>5</sup> In contrast to previous studies that equate high concentration with lack of competition, recent papers that use direct measures of banks’ pricing behavior provide less ambiguous findings on the link between competition and access to finance. Using the Panzar and Rosse H- statistic (1982,1987), which captures the elasticity of bank revenues to input prices, Claessens and Laeven (2005) find that competition is positively associated with countries’ industrial growth in a sample of 16 countries over the period 1980-1990.<sup>6</sup> The authors argue that this suggests that more competitive banking sectors are better at providing financing to financially dependent firms. Exploiting a very rich dataset on Spanish SMEs and using the Lerner (1934) index – the difference between banks’ prices and marginal costs relative to prices - as a measure of competition, Carbó-Valverde, Rodriguez Fernandez, and Udell (2009) also find evidence that competition promotes access to finance.<sup>7</sup> At the same time, the authors find that their results for

> 4 A related literature for the US has examined the impact of bank deregulation on access to finance. Zarutskie (2006) finds that deregulation in the US, which increased the competitiveness of US banking markets, caused newly formed firms to use significantly less external debt, consistent with the notion that competition exacerbates credit constrains. Rice and Strahan (2010) exploit the geographical variation in branching restrictions across US states and find that in states more open to branching, small firms are more likely to borrow and do so at lower rates. However, the authors find that there no effects on the amount that small firms can borrow.

> 5 Relatedly, there are studies on the impact of bank mergers on SME lending that find that these firms can be hurt by mergers (see Peek and Rosengren, 1996; Berger et al., 1998; Sapienza, 2002; Bonaccorsi di Patti and Gobbi, 2007; and  Degryse, Masschelein and Mitchell, 2010 among others). Erel (2011) shows that while, in general, bank mergers can benefit borrowers through lower interest rates, if the geographical overlap between merging banks is so extensive as to significantly increase concentration in banking markets, then spreads increase after mergers.

> 6 Higher values of the H-statistic are associated with more competitive banking systems.

> 7 Higher values of the Lerner index denote higher markups and lower levels of bank competition.

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