Essays on bank lending and firm innovation

Abstract

This thesis consists of two essays on bank lending and firm innovation. Using the syndicate data, the essays investigate the effect of lending to innovative firms on banks. In the first chapter, I study the question: Do banks benefit from lending to innovative firms? Combining a number of datasets from the U.S. for the period of 1986 to 2011, I find that banks with innovation-lending expertise can benefit from lending to innovation-competitive firms by lowering default risk or increasing the probabilities of future business. Additionally, I show that banks gain expertise by continuous lending to innovative firms. Furthermore, a firm’s innovation efficiency matters more to a lender than the number of patents do. Besides examining the self-learning process of banks, I also study the influence of technology prevalence on banks’ knowledge of innovation. In the second chapter, I use cross-border syndicate loans to examine how innovation proximity between the lender’s home country and the borrower affects bank’s decision in lending to overseas innovative firms. Using transactions in 1997-2006, I show that high innovation proximity between the counterparties will increase the lending probability. While firms with high borrowing proximity will show better innovation performance, banks with high lending proximity will achieve higher profitability and loan quality. I contribute to the literature by elucidating the mechanisms by which banks value borrower innovation.