Political uncertainty and the geographic allocation of credit: evidence from small businesses

Geraldo Cerqueiro, Ana Mão-de-Ferro, María Fabiana Penas*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

We investigate how banks change the geographic distribution of their small business loan portfolio when they face political uncertainty in some of the states where they operate. Using exogenous variation in gubernatorial elections with binding term limits, we show that political uncertainty causes local banks to increase out-of-state lending to small firms, particularly those located in higher-income areas. This effect follows a decrease in local lending and is stronger for banks that are more capital-constrained. The increase in out-of-state credit leads to an increase in employment growth and net firm creation in sectors with larger capital needs.

Original languageEnglish
JournalJournal of Money, Credit and Banking
DOIs
Publication statusAccepted/In press - 23 May 2024

Keywords

  • Banking industry
  • Political uncertainty
  • Small firms

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