The effect of bank branch closures on new firm formation: the Swedish case
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The effect of bank branch closures on new firm formation: the Swedish case Cynthia Sin Tian Ho1 · Björn Berggren1 Received: 13 March 2019 / Accepted: 24 February 2020 © The Author(s) 2020
Abstract In this paper, the effect of local bank branch closures on new firm formation in Sweden is analysed using a panel database that captures the geographical locations of all Swedish bank branches in 2007 and 2013. The previous research has shown that the further a firm is located away from the bank, the higher the monitoring costs will be for the banks. Furthermore, an increase in the distance to the banks will also increase information asymmetry because of the banks’ eroded ability to collect and analyse soft information. Due to the high risks associated with the lack of information and uncertainty, banks might not be as willing to extend credits to a distant firm compared to a nearby firm. Using spatial econometric analysis at a municipal level, it is shown that bank proximity to firms, unemployment rate, industry structures, income growth, change in housing price and percentage of immigrants are vital for new firm formation in Sweden. From the spatial Durbin model with fixed effects, an increase in the weighted distance to the nearest bank branches is shown to affect new firm formation negatively. JEL Classifcation L26 · G21 · R11 · C33
1 Introduction Over the past 20 years, a common practice within banks around the developed world has been to shut down local bank branches (Morrison and O’Brien 2001; Cole et al. 2004; Nguyen 2015). This practice results in banks becoming more geographically concentrated in financial centres, dynamic regions and metropolitan areas (Alessandrini et al. 2009). The factors that contribute to the decline of bank branches outside of metropolitan areas are the high operating costs of bank branch networks, new regulations, the advent of new financial technology and online banking services * Cynthia Sin Tian Ho [email protected] 1
Department of Real Estate and Construction Management, KTH - The Royal Institute of Technology, Stockholm, Sweden
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C. S. T. Ho, B. Berggren
(Argent and Rolley 2000; Dick 2006). However, the disappearance of banks could potentially be unfavourable to entrepreneurs in the countryside as both proximity to banks and personal relationships are very important for small businesses to gain access to credits (Petersen and Rajan 2002; Agarwal and Hauswald 2010). Especially in the countryside, a relatively larger proportion of entrepreneurs within cash-dependent sectors such as tourism and retail might have greater problems than entrepreneurs in other industries when the local bank branch is closed down (Leyshon et al. 2008; Berggren and Silver 2010). In addition, institutional venture capital tends to be concentrated in financial centres and metropolitan regions, which leaves remote regions at a greater disadvantage when applying for funding of comparable projects (Mason and Harrison 1995; Mason et al. 2016; Fili et al. 2013). Thus, the closure of
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