Government Ownership of Banks and Corporate Innovation

Bian, B, Haselmann, R, Vig, V and di Mauro, B W (2019) Government Ownership of Banks and Corporate Innovation. Working Paper. Working Paper.

Abstract

In this paper we analyze the impact of government and private ownership of banks on corporate innovation. We find that firms with more financing from government-owned banks are less (more) likely to initiate (exit) innovation. Among the innovators, firms that finance more through private banks have more innovative output. These findings could be driven by the selection of lending relationships based on firms' preferences to innovate or, alternatively, by the crowding out of innovation due to the presence of government-owned banks. To differentiate between these two explanations, we use the timing of government-owned bank distress events over the electoral cycle as an instrument. We show a remarkable increase in innovation following an exogenous decrease in government ownership of banks. Moreover, the allocation of credit is more responsive to the financing needs of future innovators among private banks, shedding light on the mechanism. Overall our results suggest that government involvement in the allocation of credit crowds out private banking and comes at the cost of lower corporate innovation.