IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v65y2019i12p5838-5860.html
   My bibliography  Save this article

To Build or to Buy? The Role of Local Information in Credit Market Development

Author

Listed:
  • Teng Wang

    (Board of Governors, Federal Reserve System, Washington, District of Columbia 20551)

Abstract

Exploiting the heterogeneity in legal constraints on local bank employees’ mobility, I show that access to local information influences banks’ modes of expansion. As restrictions on interbank labor mobility are relaxed, banks entering a new market establish branches directly instead of acquiring incumbent branches, resulting in a shift of composition of entrants. The treatment effect is strengthened when information asymmetries between local banks and entrants are severe. Furthermore, I find a surge in the volume and a reduction in the rates of local small business loans originated by surrounding incumbent banks after the entry of outside banks, especially after entrants establish new branches.

Suggested Citation

  • Teng Wang, 2019. "To Build or to Buy? The Role of Local Information in Credit Market Development," Management Science, INFORMS, vol. 65(12), pages 5838-5860, December.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:12:p:5838-5860
    DOI: 10.1287/mnsc.2018.3105
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287/mnsc.2018.3105
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2018.3105?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Zoran Ivković & Scott Weisbenner, 2005. "Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments," Journal of Finance, American Finance Association, vol. 60(1), pages 267-306, February.
    2. Sandra E. Black, 1999. "Do Better Schools Matter? Parental Valuation of Elementary Education," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 577-599.
    3. Bruce Fallick & Charles A. Fleischman & James B. Rebitzer, 2006. "Job-Hopping in Silicon Valley: Some Evidence Concerning the Microfoundations of a High-Technology Cluster," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 472-481, August.
    4. Zarutskie, Rebecca, 2006. "Evidence on the effects of bank competition on firm borrowing and investment," Journal of Financial Economics, Elsevier, vol. 81(3), pages 503-537, September.
    5. Qiu, Buhui & Wang, Teng, 2018. "Does Knowledge Protection Benefit Shareholders? Evidence from Stock Market Reaction and Firm Investment in Knowledge Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(3), pages 1341-1370, June.
    6. April M. Franco & Matthew F. Mitchell, 2008. "Covenants not to Compete, Labor Mobility, and Industry Dynamics," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(3), pages 581-606, September.
    7. Loretta J. Mester & Leonard I. Nakamura & Micheline Renault, 2007. "Transactions Accounts and Loan Monitoring," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 529-556.
    8. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    9. Astrid A. Dick, 2006. "Nationwide Branching and Its Impact on Market Structure, Quality, and Bank Performance," The Journal of Business, University of Chicago Press, vol. 79(2), pages 567-592, March.
    10. Marianne Bertrand & Antoinette Schoar & David Thesmar, 2007. "Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985," Journal of Finance, American Finance Association, vol. 62(2), pages 597-628, April.
    11. Bae, Kee-Hong & Stulz, René M. & Tan, Hongping, 2008. "Do local analysts know more? A cross-country study of the performance of local analysts and foreign analysts," Journal of Financial Economics, Elsevier, vol. 88(3), pages 581-606, June.
    12. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2009. "Does Local Financial Development Matter?," Springer Books, in: Damiano Bruno Silipo (ed.), The Banks and the Italian Economy, chapter 0, pages 31-66, Springer.
    13. William Greene, 2004. "The behaviour of the maximum likelihood estimator of limited dependent variable models in the presence of fixed effects," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 98-119, June.
    14. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
    15. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-452, March.
    16. Sumit Agarwal, 2010. "Distance and Private Information in Lending," The Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2757-2788, July.
    17. Steven N. Kaplan & Per Strömberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 281-315.
    18. Rajan, Raghuram G, 1992. "Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September.
    19. Huang, Rocco R., 2008. "Evaluating the real effect of bank branching deregulation: Comparing contiguous counties across US state borders," Journal of Financial Economics, Elsevier, vol. 87(3), pages 678-705, March.
    20. Paul Almeida & Bruce Kogut, 1999. "Localization of Knowledge and the Mobility of Engineers in Regional Networks," Management Science, INFORMS, vol. 45(7), pages 905-917, July.
    21. Mark J. Garmaise, 2011. "Ties that Truly Bind: Noncompetition Agreements, Executive Compensation, and Firm Investment," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 27(2), pages 376-425.
    22. Baik, Bok & Kang, Jun-Koo & Kim, Jin-Mo, 2010. "Local institutional investors, information asymmetries, and equity returns," Journal of Financial Economics, Elsevier, vol. 97(1), pages 81-106, July.
    23. Lars Norden & Martin Weber, 2010. "Credit Line Usage, Checking Account Activity, and Default Risk of Bank Borrowers," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3665-3699, October.
    24. Giovanni Dell'Ariccia & Luc Laeven & Gustavo A. Suarez, 2017. "Bank Leverage and Monetary Policy's Risk-Taking Channel: Evidence from the United States," Journal of Finance, American Finance Association, vol. 72(2), pages 613-654, April.
    25. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 249-275.
    26. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn.
    27. Petersen, Mitchell A & Rajan, Raghuram G, 1994. "The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    28. Jith Jayaratne & Philip E. Strahan, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 639-670.
    29. Tara Rice & Philip E. Strahan, 2010. "Does Credit Competition Affect Small‐Firm Finance?," Journal of Finance, American Finance Association, vol. 65(3), pages 861-889, June.
    30. Argote, Linda & Ingram, Paul, 2000. "Knowledge Transfer: A Basis for Competitive Advantage in Firms," Organizational Behavior and Human Decision Processes, Elsevier, vol. 82(1), pages 150-169, May.
    31. Matt Marx & Deborah Strumsky & Lee Fleming, 2009. "Mobility, Skills, and the Michigan Non-Compete Experiment," Management Science, INFORMS, vol. 55(6), pages 875-889, June.
    32. Thomas J. Holmes, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 667-705, August.
    33. Ogura, Yoshiaki, 2006. "Learning from a rival bank and lending boom," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 535-555, October.
    34. Harald Hau, 2001. "Location Matters: An Examination of Trading Profits," Journal of Finance, American Finance Association, vol. 56(5), pages 1959-1983, October.
    35. Shaffer, Sherrill, 1998. "The Winner's Curse in Banking," Journal of Financial Intermediation, Elsevier, vol. 7(4), pages 359-392, October.
    36. Joshua D. Coval & Tobias J. Moskowitz, 2001. "The Geography of Investment: Informed Trading and Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 811-841, August.
    37. Jaeyong Song & Paul Almeida & Geraldine Wu, 2003. "Learning--by--Hiring: When Is Mobility More Likely to Facilitate Interfirm Knowledge Transfer?," Management Science, INFORMS, vol. 49(4), pages 351-365, April.
    38. Christopher J. Malloy, 2005. "The Geography of Equity Analysis," Journal of Finance, American Finance Association, vol. 60(2), pages 719-755, April.
    39. Dell'Ariccia, Giovanni & Marquez, Robert, 2004. "Information and bank credit allocation," Journal of Financial Economics, Elsevier, vol. 72(1), pages 185-214, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wang, Teng, 2021. "Local banks and the effects of oil price shocks," Journal of Banking & Finance, Elsevier, vol. 125(C).
    2. Chu, Yinxiao & Li, Zhao & Wei, Jianxing & Wu, Weixing, 2022. "A tale of two markets: Labor market mobility and bank information sharing," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    3. Sharjil M. Haque & Simon Mayer & Teng Wang, 2024. "How Private Equity Fuels Non-Bank Lending," Finance and Economics Discussion Series 2024-015, Board of Governors of the Federal Reserve System (U.S.).
    4. Kong, Dongmin & Kong, Gaowen & Liu, Shasha & Zhu, Ling, 2022. "Does competition cause government decentralization? The case of state-owned enterprises," Journal of Comparative Economics, Elsevier, vol. 50(4), pages 1103-1122.
    5. Teng Wang, 2020. "Branching Networks and Geographic Contagion of Commodity Price Shocks," Finance and Economics Discussion Series 2020-034, Board of Governors of the Federal Reserve System (U.S.).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Teng Wang, 2017. "To Build or to Buy? The Role of Local Information in Credit Market Development," Finance and Economics Discussion Series 2017-013, Board of Governors of the Federal Reserve System (U.S.).
    2. Wang, Teng, 2015. "Bank Entry Mode, Labor Market Flexibility and Economic Activity," HIT-REFINED Working Paper Series 25, Institute of Economic Research, Hitotsubashi University.
    3. Michalski, Tomasz & Ors, Evren, 2012. "(Interstate) Banking and (interstate) trade: Does real integration follow financial integration?," Journal of Financial Economics, Elsevier, vol. 104(1), pages 89-117.
    4. Florian Leon, 2015. "What do we know about the role of bank competition in Africa?," CERDI Working papers halshs-01164864, HAL.
    5. Teng Wang, 2020. "Branching Networks and Geographic Contagion of Commodity Price Shocks," Finance and Economics Discussion Series 2020-034, Board of Governors of the Federal Reserve System (U.S.).
    6. David C. Ling & Andy Naranjo & Benjamin Scheick, 2021. "There is no place like home: Information asymmetries, local asset concentration, and portfolio returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(1), pages 36-74, March.
    7. Kerr, William R. & Nanda, Ramana, 2009. "Democratizing entry: Banking deregulations, financing constraints, and entrepreneurship," Journal of Financial Economics, Elsevier, vol. 94(1), pages 124-149, October.
    8. Wang, Teng, 2021. "Local banks and the effects of oil price shocks," Journal of Banking & Finance, Elsevier, vol. 125(C).
    9. Giorgio Barba Navaretti & Anna Cecilia Rosso, 2023. "Access to capital markets and the geography of productivity leaders and laggards," Journal of Regional Science, Wiley Blackwell, vol. 63(1), pages 64-113, January.
    10. Chu, Yongqiang, 2018. "Banking deregulation and credit supply: Distinguishing the balance sheet and the competition channels," Journal of Financial Intermediation, Elsevier, vol. 35(PA), pages 102-119.
    11. John (Jianqiu) Bai & Daniel Carvalho & Gordon M. Phillips, 2018. "The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity," Journal of Finance, American Finance Association, vol. 73(6), pages 2787-2836, December.
    12. Masami Imai, 2008. "Crowding-Out Effects of a Government-Owned Depository Institution: Evidence from a Natural Experiment in Japan," Wesleyan Economics Working Papers 2008-003, Wesleyan University, Department of Economics.
    13. Senay Agca & Pablo Slutzky & Stefan Zeume, 2021. "Anti-Money Laundering Enforcement, Banks, and the Real Economy," Working Papers 2021-20, The George Washington University, Institute for International Economic Policy.
    14. Kenneth A. Younge & Tony W. Tong & Lee Fleming, 2015. "How anticipated employee mobility affects acquisition likelihood: Evidence from a natural experiment," Strategic Management Journal, Wiley Blackwell, vol. 36(5), pages 686-708, May.
    15. Ogura, Yoshiaki, 2012. "Lending competition and credit availability for new firms: Empirical study with the price cost margin in regional loan markets," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1822-1838.
    16. Çağatay Bircan & Ralph De Haas, 2020. "The Limits of Lending? Banks and Technology Adoption across Russia," The Review of Financial Studies, Society for Financial Studies, vol. 33(2), pages 536-609.
    17. Jiang, Tianjiao & Levine, Ross & Lin, Chen & Wei, Lai, 2020. "Bank deregulation and corporate risk," Journal of Corporate Finance, Elsevier, vol. 60(C).
    18. Daniel Aobdia, 2018. "Employee mobility, noncompete agreements, product-market competition, and company disclosure," Review of Accounting Studies, Springer, vol. 23(1), pages 296-346, March.
    19. Viral V. Acharya & Jean Imbs & Jason Sturgess, 2011. "Finance and Efficiency: Do Bank Branching Regulations Matter?," Review of Finance, European Finance Association, vol. 15(1), pages 135-172.
    20. Aadil Nakhoda, 2013. "Bank Competition and Export Diversification," EERI Research Paper Series EERI RP 2013/12, Economics and Econometrics Research Institute (EERI), Brussels.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:65:y:2019:i:12:p:5838-5860. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.