Financial crisis, Bank failures and corporate innovation

Using firm-level data, we study the impact of bank failures on corporate innovation. We find that exposure to a bank failure reduces the number of patents by 0.34 and citations by 0.35, implying a loss of 21% and 22%, respectively. Such effects are most pronounced for explorative innovation and for firms more dependent on external financing. These effects point to the interdependence between bank failures and corporate decisions, highlighting an important role for government intervention. We show that the TARP helped banks to reduce such pernicious effects on innovation, which is primarily driven by TARP recipient banks headquartered in the county of the bank failure and by large TARP receiving banks.