Bank specialisation and corporate innovation

Summary

Focus

Theoretical models offer conflicting predictions on how lenders' sectoral specialisation affects firms' innovation activities. On one hand, banks specialising in particular sectors may develop unique expertise, enabling them to better assess and support the opaque and risky investments essential for innovation. On the other hand, innovation can create spillovers where one firm's technological advancements negatively impact the value of other firms' existing assets. Specialised banks, which are more exposed to these potential spillovers, may be more inclined to impede innovation, especially in sectors where the risk of such spillovers is high. Despite these theories, empirical research on the link between bank specialisation and corporate innovation is limited.

Contribution

To empirically examine these opposing theoretical hypotheses, our paper employs two distinct data sets. The first data set combines US syndicated loan data with patent records, focusing primarily on large, publicly listed firms that engage in patenting activities. The second data set includes credit register data combined with micro-level innovation survey data from Belgium, covering unpatented innovations by smaller firms that rely heavily on bank credit. These complementary data sets enable us to draw more robust conclusions about the role of bank specialisation across different types of firms, forms of innovation and geographic areas.

Findings

Our findings reveal a nuanced relationship that varies with the degree of "asset overhang" – the risk that an innovation will negatively affect banks' existing loan portfolios through technological spillovers. Bank specialisation fosters innovation in sectors with low asset overhang, where banks can use their expertise to support innovation without fearing negative impacts on their existing assets. In contrast, in sectors with high asset overhang, specialised banks tend to constrain innovation due to perceived risks of technological spillovers eroding the value of their current loan portfolios.

Abstract

Theory offers conflicting predictions on whether and how lenders' sectoral specialization would affect firms' innovation activities. We show that the sign and magnitude of this effect vary with the degree of "asset overhang" across sectors, which is the risk that a new technology has negative spillovers on the value of a bank's legacy loan portfolio. Using both patent data and micro-level innovation survey data, we find that lenders' sectoral specialization improves innovation for firms operating in sectors with low asset overhang, but impedes innovation for firms operating in sectors with high asset overhang. These results hold for two distinct measures of asset overhang and using bank mergers as a source of exogenous variation in bank specialization. We further show that these heterogeneous effects arise through financial contracting. Overall, our findings provide novel insights into the dual facets of bank specialization and, more broadly, the link between banking and innovation.

JEL Classification: G20, O30, L20

Keywords: bank specialization, bank lending, corporate innovation, asset overhang, financial frictions