Democratizing entry: Banking deregulations, financing constraints, and entrepreneurship

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jfineco.2008.12.003 Byline: William R. Kerr, Ramana Nanda Abstract: We examine entrepreneurship and creative destruction following US banking deregulations using US Census Bureau data. US banking reforms brought about exceptional growth in both entrepreneurship and business closures. Most of the closures, however, were the new ventures themselves. Although we find evidence for the standard story of creative destruction, the most pronounced impact was a massive increase in churning among new entrants. We argue that creative destruction requires many business failures along with the few great successes. The successes are difficult to identify ex ante, which is why democratizing entry is an important trait of well-functioning capital markets. Author Affiliation: Harvard Business School, Boston, MA 02163, USA Article History: Received 13 October 2008; Revised 12 December 2008; Accepted 15 December 2008 Article Note: (footnote) [star] We are grateful to Rodrigo Canales, Nicola Cetorelli, Shawn Cole, Jim Davis, Ed Glaeser, Paul Gompers, Victoria Ivashina, Ron Jarmin, Josh Lerner, Ross Levine, Javier Miranda, Debarshi Nandy, Mitch Petersen, Steve Ross, David Scharfstein, Antoinette Schoar, Jesper Sorensen, Scott Stern, Phil Strahan, Rebecca Zarutskie, and seminar participants at the US Census Bureau, Danish Research Unit for Industrial Dynamics, European Regional Science Association, Harvard University, Innovation, Policy, and the Economy Group, Kellogg School of Management, London School of Economics and Political Science, Massachusetts Institute of Technology, National Bureau of Economic Research, New York Federal Reserve Board, Reserve Bank of India, and the University of Connecticut for insightful comments on this paper. We also thank the Innovation Policy and the Economy group for financial assistance. The research in this paper was conducted while we were Special Sworn researchers of the US Census Bureau at the Boston Census Research Data Center. Support for this research from National Science Foundation (NSF) Grant (ITR-0427889) is gratefully acknowledged. Research results and conclusions expressed are our own and do not necessarily reflect the views of the Census Bureau or NSF. This paper has been screened to ensure that no confidential data are revealed. A first draft of this paper was circulated in December 2006. All results discussed but not formally presented are available upon request.