I show that the deregulation of bank branching in the United States lowered the sensitivity of small business growth to local credit supply. In urban markets, within-state deregulation of branching resulted in an 80% decrease in the effect of local deposit growth on the growth of establishments with 20-99 employees. Across-state deregulation had an effect of comparable size in county markets. I fiijnd effects of similar magnitude using employment growth and payroll growth as measures of business growth. Using the history of litigation over the scope of state bank regulation, I show these results continue to hold for states that deregulated branching for reasons that were unrelated to economic conditions. These fiijndings suggest that bank deregulation played an important role in insuring small businesses against local shocks to credit supply.

Using business registry data from China, we show that internal capital markets in business groups can propagate corporate shareholders’ credit supply shocks to their subsidiaries. An average of 16.7% local bank credit growth where corporate shareholders are located would increase subsidiaries investment by 1% of their tangible fixed asset value, which accounts for 71% (7%) of the median (average) investment rate among these firms. We argue that equity exchanges is one channel through which corporate shareholders transmit bank credit supply shocks to the subsidiaries and provide empirical evidence to support the channel.

We study the impact of bank credit on firm productivity. We exploit a matched firm-bank database covering all the credit relationships of Italian corporations, together with a natural experiment, to measure idiosyncratic supply-side shocks to credit availability and to estimate a production model augmented with financial frictions. We find that a contraction in credit supply causes a reduction of firm TFP growth and also harms IT-adoption, innovation, exporting, and adoption of superior management practices, while a credit expansion has limited impact. Quantitatively, the credit contraction between 2007 and 2009 accounts for about a quarter of observed the decline in TFP.