Essays on the real effects of banking development and concentration

This thesis consists of three essays on the impact of banking development and concentration on the real economy. By looking at three specific mechanisms, this work supports the hypothesis that access to finance may be a barrier to entry and exit of firms. Furthermore, it provides empirical evidence of non-linearity in the relationship between banking market structure and the real economy. The three essays adopt the Rajan-Zingales (1998) methodology, which is especially useful for establishing a causal relationship between finance and real sector performance as well as for overcoming potential endogeneity problems. The first essay investigates the relationship between bank concentration and the real economy by analyzing the number and average size of firms in manufacturing industries in two samples of countries with differing levels of economic development. The main finding is that in developed countries a higher bank concentration is associated with a lower number of firms, of bigger size, while in developing countries this relationship does not seem significant. The second essay analyzes the effect of bank concentration on firm demography, conditional on the depth of credit markets. The empirical evidence on a sample of EU countries shows negative effects of bank concentration on firm demography when domestic the size of banking market is sufficiently large. This suggests that bank concentration in itself is not a barrier to entry and exit of firms. The third essay extends a recent cross-country study by Coricelli and Roland (2008) on the asymmetric effects of banking development on real economy performance, distinguishing periods of economic expansion from declines. Using data for Italy, this essay examines the issue at regional level and shows that more developed local credit markets are associated with lower declines in firm net entry rates