Bank Competition, Financial Dependence and Productivity Growth in Europe

Mercredi | 2015-03-25
salle B103, 12h-14h

Aurélien LEROY

This paper empirically analyses the links between banking competition and manufacturing productivity growth for a sample of 10 European countries over the period 1999-2009. To test this relationship, which is from a theoretical point of view unclear, we use a difference-in-difference methodology close to the one proposed by Rajan and Zingales (1998). We find that the total factor productivity of the most financially dependent industries grows at a slower rate in economies where banking competition is fiercer. We explain this result by the fact that market power,i.e. low competition, would promote relationship-banking, as theoretically argued by Petersen and Rajan (1995) for instance. Indeed relationship banking would allow banks to reduce information asymmetries, which would benefit to the smalland/or young firms. In this way, the allocation of funds would be better. Banks may select more the best firms which would increase total factor productivity of the industries more dependent on external finance. Furthermore, by improving firm dynamics, bank market power could spur the productivity growth of incumbents firms.