Bank Concentration and Misallocation of Credit : Evidence from Firm Entry and Exit

This paper empirically investigates the effect of interbank competition and misallocation of credit on the creation and destruction of establishments. Using industry and prefecture level establishment data from Japan, we find that concentration in the banking sector negatively affects start-up and exit rates in industries with a greater dependence on external financing and a greater value of intangible fixed assets. Next, we examined the effect of banks' misallocation of credit. We find the effect of bank concentration on start-up and exit rates in informational opaque industries is weakened by the presence of zombie, financially unhealthy, and otherwise insolvent firms. We also find firm entry in informational opaque industries is encouraged in a market where government capital injected banks operate, offsetting the negative effects of bank concentration. Banks' non-performing loans have no significant effect on firm entry and exit. These results suggest bank loan market structure, the presence of zombie firms, and an increase of credit supply following capital injection into banks play a significant role regarding firm entry and exit