Banking deregulation, financing constraints and entrepreneurship

We study how U.S. branch banking deregulations affected the entry of new firms in the non-financial sector using establishment-level data from the U.S. Census Bureau's Longitudinal Business Database. The comprehensive micro-data allow us to study how both the entry rate and the distribution of entry sizes for new startups responded to changes in banking competition. Moreover, we distinguish the relative effect of the policy reforms on the entry of startups compared to the opening of new establishments by existing firms. We find interstate banking deregulations had a strong positive effect on the birth of new firms relative to the facility expansions of existing firms. We find limited evidence that the intrastate banking deregulations influenced entry. Our results have implications for existing theories of financial constraints for entrepreneurs, as well as research looking at the effect of banking competition on the efficient allocation of capital.