Banking competition and firm-level financial constraints in Latin America

Abstract

Prior literature argues that, given the existence of information asymmetries and agency costs, higher competition may increase financial constraints by reducing banks' incentives to build lending relationships. Using a sample of listed firms for six Latin American countries, we analyze the relation between banking competition and financial constraints. We find evidence in line with prior research that banking competition increases financial constraints. This result is robust and heterogeneous. We include other country-specific variables and check the robustness of our findings; the main results hold. Our results show that the effect of competition differs across firms and industries. Specifically, consistent with the information hypothesis, the negative impact of competition is higher for small quoted firms and for lowassets tangibility industries. Also, as expected, we find evidence that firms are more affected by financial constraints during the last crisis. This negative effect is larger for firms in more competitive banking industries.

Bank Market Power and Firm Finance: Evidence from Bank and Loan Level Data

“…where firm size is captured by (the log of) firm assets, and the length of relationship is computed as the difference between the date of loan l, and the period in which the firm-bank pair appeared for the first time in the loan-level dataset. The inclusion of this variable capturing credit history is a conceptual and methodological contribution of this paper, since it is not available from the kind of firm-and bank-level datasets used by previous studies like Fungacova et al (2017), Alvarez andJara (2016) andvan Leuvensteijn et al (2013). We view the length of a credit relationship as a better measure of asymmetric information for a specific bank-firm pair than other measures used in previous work such as firm size.…”

“…Moreover, the paper can only approximate the cost of credit at the firm-level using accounting data. The papers by Love and Martinez-Peria (2015), Leon (2015) and Alvarez and Jara (2016) make use of the Boone indicator but rather than looking at interest rate spreads are forced to use a dichotomous measure of financial constraints due to data limitations. Alvarez and Jara (2016) has the additional disadvantage that only listed firms were used in the study.…”

“…The papers by Love and Martinez-Peria (2015), Leon (2015) and Alvarez and Jara (2016) make use of the Boone indicator but rather than looking at interest rate spreads are forced to use a dichotomous measure of financial constraints due to data limitations. Alvarez and Jara (2016) has the additional disadvantage that only listed firms were used in the study. Ryan et al (2014) does construct a continuous variable of financial constraints but uses only the Lerner index.…”

Do legal and institutional environments matter for banking system performance?

“…Increased competition in the banking industry resulting from greater information sharing reduces bank profits in the second period, but not in the first when the banks still have private information (Alvarez & Jara, 2016). Consequently, a greater degree of information sharing reduces the market power of the banks and informational earnings, thus curbing interest rates, moral risk and default rates while increasing the volume of credit provided by the banking sector.…”

Financial Infrastructure and Access to Finance for European SMEs

“…On the other hand, the information hypothesis argues that, given the existence of information asymmetries and agency costs, higher competition increases financial constraints by reducing banks' incentives to build lending relationships [18]. Also, previous empirical evidence, which has mostly used concentration measures as proxies for competition, is also mixed [15,17,19].…”