Bank Lending and Corporate Innovation: Evidence from SFAS 166/167*

Abstract

Understanding the role of bank lending in corporate innovation is important to policymakers, practitioners, and academics. We provide new evidence on such a role by exploiting the implementation of SFAS 166/167, which removed the off-balance sheet status of certain securitized assets of banks. The regulation affects bank lending and thus represents a credit supply shock to borrowing firms. We find that affected banks raise spreads and cut loan amounts after the regulation. Firms that borrow from affected banks reduce R&D investment and the number and quality of the patents they generate. The reduction is concentrated among firms whose banks experience more downward pressure on capital ratios and greater market discipline, and firms that are more dependent on external financing. Additional analyses reveal that information asymmetry between incumbent banks and outsiders with respect to borrowing firms prevent them from switching. The overall findings suggest that bank lending promotes borrowing firms' innovation activities. Policies that restrict bank lending are likely to hurt innovation of borrowers.

Transmission Effects of ESG Disclosure Regulations Through Bank Lending Networks

“…Second, I expect a stronger transmission effect on borrowers with higher loan reliance. I measure borrowers' loan reliance on affected banks using the five-year look-back window to capture the proportion of a firm's total assets financed by loans from affected non-U.S. banks (Loan Reliance) (Bharath et al [2007], Lo [2014], Dou and Xu [2021]). I then define a binary variable, High Loan Reliance, capturing whether the measure is above the sample median.…”

“…I measure Relationship Length as the total number of years since the first loan was initiated with a bank until the year when the bank is affected by its home country's ESG disclosure regulation. I define #Prior Deals as the number of pre‐disclosure deals that a firm has with an affected bank (Dou and Xu [2021]). I then define two binary variables, High Length and High #Prior Deals , capturing whether the measure is above the sample median.…”

“…banks ( Loan Reliance ) (Bharath et al. [2007], Lo [2014], Dou and Xu [2021]). I then define a binary variable, High Loan Reliance , capturing whether the measure is above the sample median.…”

The Effect of Banking Deregulation on Borrowing Firms' Risk‐Taking Incentives*†

“…This bank-level (rather than market-level) shock, combined with detailed data on lending relationships, allows better identification of bank loans' impacts on borrowers. For example, Dou and Xu (2021) exploit the adoption of the SFAS 166 and 167 (FASB 2009a(FASB , 2009b, which force banks to consolidate some previously off-balance sheet securitized loan assets and thus reduce their supply of corporate loans. They find a reduction in R&D and patent production for firms that borrow from affected banks, suggesting that bank lending promotes borrowers' innovation.…”