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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
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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

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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.

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