Review of Finance Advance Access originally published online on November 18, 2007
Review of Finance 2009 13(2):181-223; doi:10.1093/rof/rfm019
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Financial Integration and Firm Performance: Evidence from Foreign Bank Entry in Emerging Markets*
1 Stockholm School of Economics, CEPR, and ECGI
2 CentER - Tilburg University and CEPR
While the positive growth effects of financial integration are extensively documented, little is known of its impact on small and young firms. This paper aims to fill this void relying on a panel of 60,000 firm-year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and use of financial debt even though the effect is dampened for small firms. More strikingly, young firms benefit most from foreign bank presence, while businesses connected to domestic banks or to the government suffer. Overall, our findings suggest that foreign banks can help to mitigate connected-lending problems and to improve capital allocation.
JEL Classification: G21, L11, L14
* We are grateful to Marco Pagano (the editor), two anonymous referees, Rebel Cole, Ralph de Haas, Christa Hainz, Vasso Ioannidou, Ralph Koijen, Luc Laeven, Raoul Minetti, Janet Mitchell, Evren Ors, Fabiana Penas, Phil Strahan, Steen Thomsen, Gunseli Tumer-Alkan, Rebecca Zarutskie, and participants at the NBER Summer Institute Corporate Finance Meeting (Boston), the CEPR Conference on Money, Banking and Finance (Rome), the CEPR European Summer Symposium in Financial Markets (Gerzensee), the CEPR Conference on Competition, Stability and Integration in European Banking (Brussels), the Conference on Corporate Governance in Closely Held Firms (Copenhagen), the ECB/CFS Network Meeting (Vienna), the EEA Meeting (Amsterdam), the EFA Meeting (Moscow), the FMA Meeting (Chicago), the FMA European Meeting (Stockholm), the EFMA (Milan), the World Bank Conference on Globalization and Financial Services in Emerging Economies (Washington DC), the Workshop on Financial Integration in Europe and the Propagation of Shocks (Berlin) and seminar participants at London Business School, Michigan State University, Brunel University, Center - Tilburg University, HEC (Paris), the Kiel Institute, the Swiss National Bank and the Universities of Amsterdam, Frankfurt, Indiana, Leuven, Munich and Utrecht for comments. Christa Hainz, Marina Martinova, Luc Renneboog and Koen Schoors kindly shared data. Lingxiao Qu provided research assistance. Giannetti gratefully acknowledges financial support from the European Central Bank, under the Lamfalussy Fellowship Program, and the Bankforskningsinstitutet. The views of this paper are those of the authors and do not necessarily reflect the views of the ECB, the Eurosystem, or its staff.
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