Bank market power and discouraged SMEs: International evidence

Abstract

This study investigates the relationship between bank market power and firms’ financing constraints, indicated by the likelihood of being discouraged from applying for bank loans. The full data sample covers more than 72,000 small and medium-size enterprises (SMEs) in 113 countries around the world. Our results from a probit selection model indicate that higher bank market power is associated with a lower likelihood of financial constraint. In addition, when we allow for a nonmonotonic effect, we document a U-shaped relationship between them. Our results are robust to various measures of bank market power and an alternative measure of financing constraints. Lastly, we show that the depth of the credit information-sharing mechanism plays a moderating role in the bank market power–discouragement nexus.