The moderating role of stock markets in the bank competition-entrepreneurship relationship

Using a worldwide database on entrepreneurship dynamics and non-structural measures of competition in banking markets, this paper provides robust international evidence on the macroeconomic impact of bank competition on new business creation. Previous research has shown that the stock market, due to its liquidity externalities, stimulates business creation by allowing and expediting the recycling of "informed capital" supplied to new start-ups by financial intermediaries. Building on the complementarity between banks and stock markets in the business creation process, the paper evaluates in a unifying framework the extent of two competing theories of bank competition effects on entrepreneurial financing. It is found that, in line with the market power hypothesis, bank competition has an overall beneficial impact on new business density by boosting credit access to new entrepreneurs. Yet, consistent with the information hypothesis, this result attenuates as the size of the stock market increases, due to the importance of relationship lending underlying the informed capital recycling.