This paper studies the relationship between the development potential of a city and the firms' access to financing, in the context of Latin American cities. Even though the relationship between banking concentration and firms' access to financing has been studied, the direction of this link seems quite fuzzy in the extant literature. Two competing theories, market-power hypothesis and information-based hypothesis differ on what the actual effect of concentration and firm´s access to financing. We developed two geographical variables using high-resolution satellite images from Google Earth, named as Potential Density Increase (PDI) and the Non-Potential Density Increase (NDI) to capture the geographical characteristics of the 30 biggest and most important cities in Latin America. In line with the information-based hypothesis, we expect to find first, a positive relation between bank concentration and firm's leverage which we show later is negatively moderated by PDI measure which represents the areas with the existing potential for more development and construction, and positively by NDI measure which represents the areas which have reached their full development potential. Furthermore, we claim a causal relationship between bank concentration and firm´s payout ratio through firm leverage channel. In our analysis, we perform various OLS regressions with fixed effects, utilizing different country and firm level characteristics as controls to make the relation as clear as possible. Further analysis for the moderation and mediation effects are performed by following the recommendations by Heyes (2018), and quantile regressions have been looked at as a possibility to better understand the relation between bank concentration and firm´s leverage.

, , ,
Incae Business School

Memarian, M, Trejos, A, & Benetti, S. (2020). Development Potential and Firm's Credit Access in Latin America.