Credit markets, relationship lending, and the dynamics of firm entry

Abstract

We study the impact of credit relationships on firm entry, and the implications for aggregate investment and output. Exploiting Italian data, we find that relationship-oriented local credit markets feature fewer, larger entrants, and relatively more spinoff entrants. Relationship lending discourages de novo entry when banks' knowledge is incumbent-specific but promotes knowledge transfers to spinoffs. We explain these patterns in a dynamic general equilibrium model where banks accumulate information in credit relationships and can reuse information when financing entrants. Relationship lending raises output, as the larger investments and the credit reallocation from de novos to spinoffs outweigh the entry slowdown.