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Review of Finance Advance Access originally published online on April 2, 2009
Review of Finance 2009 13(2):309-340; doi:10.1093/rof/rfp003
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© The Authors 2009. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Bank Market Power and SME Financing Constraints*

Santiago Carbó-Valverde1, Francisco Rodríguez-Fernández2 and Gregory F. Udell3

1 University of Granada and Federal Reserve Bank of Chicago
2 University of Granada
3 Kelley School of Business, Indiana University

Some studies find that market power is associated with credit availability (information hypothesis); others find that less competitive banking markets lead to more credit rationing (market power hypothesis). Empirical research has relied solely on concentration as a measure of market power. The industrial organization literature, however, argues that a structural competition indicator such as the Lerner index is a superior measure. We test the information hypothesis and the market power hypothesis using these two alternative measures of market power and find that they generally give conflicting results. However, we also offer evidence suggesting that both views can be reconciled.

JEL Classification: G21, L11

* We thank the editor Marco Pagano and an anonymous referee for helpful comments that greatly improved this paper. We are also grateful to Nicola Cetorelli, Mark Flannery and other participants in the 42nd Annual Conference on Bank Structure and Competition held at the Federal Reserve Bank of Chicago in May 2006 for very helpful comments. Finally, we appreciate comments from Allen Berger, Tim Hannan, Joaquín Maudos, participants in the 1st Fall Workshop on Economics held in Granada in October 2005 (including Tony Saunders, José Manuel Campa, and Hans Degryse), as well as to Marcel Tyrell and other participants in the Annual Congress of the EEA/ESEM held in Vienna in August 2006. We acknowledge financial support from the Spanish Ministry of Science and Innovation and FEDER (ECO2008-05243/ECON) and FUNCAS. The views in this paper are those of the authors and may not represent the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.


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