Contributions published at Banking (Steven Ongena)

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Different modes of external finance provide heterogeneous benefits for the borrowing firms. Informal finance offers informational advantages whereas formal finance is scalable. Using unique survey data from China, we find that informal finance is associated with higher sales growth for small firms but lower sales growth for large firms. We identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms. Co-funding, thereby simultaneously using the informational advantage of informal finance and the scalability of formal finance, is therefore the optimal choice for small firms.

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We find that stricter merger control legislation increases abnormal announcement returns of targets in bank mergers by 7 percentage points. Analyzing potential explanations for this result, we document an increase in the pre-merger profitability of targets, a decrease in the size of acquirers and a decreasing share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks and the stock market response of rivals appear unaffected. The evidence suggests that the strengthening of merger control leads to more efficient and more competitive transactions.

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The nexus between ownership and competition in the banking sector is a major concern to policymakers around the world but one that is rarely comprehensively examined. For 131 countries and 13 years we match bank ownership with over 50,000 bank-year estimates of individual bank market power. We find that ownership does not explain market power at the individual bank level. However, at the country level, foreign bank ownership has a positive and significant impact on market power mainly because foreign banks enter through mergers or acquisitions and not through greenfield investments. The observed increases in market power primarily originate from decreases in the marginal cost.

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We investigate the geographical proximity of firms to their relationship banks. We find that (compared to the firms` average bank) Islamic, foreign and state banks are more, and large banks less remote to their borrowers. We also find that the probability for a firm to connect to a bank substantially decreases in distance, but that the choice along bank characteristics determines how potent distance is in its impact. For example, if the bank in the vicinity is an Islamic bank, distance plays a more muted role, especially in cities in the Mediterranean and Aegean regions, as well as in cities with a high conservative party vote and higher trust in religious institutions. Also when engaging with small, foreign or state banks physical distance no longer plays a crucial role in determining the firms` choices. Overall these findings suggest that the presence of banks with certain characteristics in the vicinity of firms may determine the within-firm and across-firm configurations of observable firm-bank connections.

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