Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/305407 
Year of Publication: 
2024
Series/Report no.: 
NBB Working Paper No. 458
Publisher: 
National Bank of Belgium, Brussels
Abstract: 
Theory offers conflicting predictions on whether and how lenders' sectoral specialization would affect firms' innovation activities. We show that the sign and magnitude of this effect vary with the degree of "asset overhang" across sectors, which is the risk that a new technology has negative spillovers on the value of a bank's legacy loan portfolio. Using both patent data and micro-level innovation survey data, we find that lenders' sectoral specialization improves innovation for firms operating in sectors with low asset overhang, but impedes innovation for firms operating in sectors with high asset overhang. These results hold for two distinct measures of asset overhang and using bank mergers as a source of exogenous variation in bank specialization. We further show that these heterogeneous effects arise through financial contracting. Overall, our findings provide novel insights into the dual facets of bank specialization and, more broadly, the link between banking and innovation.
Subjects: 
Bank specialization
Bank lending
Corporate innovation
Asset overhang
Financial frictions
JEL: 
G20
O30
L20
Document Type: 
Working Paper

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