On Regional Bank Concentration and Firm Leverage: The Case of Colombia

ABSTRACT

Disparities in regional bank concentration within Colombia, an emerging economy, are studied to evaluate their effects in the book leverage of local enterprises. Analyzing the 2016–2021 financial statements of 18,812 companies established in the country, we find evidence that the book leverage of individual firms is significantly correlated with the concentration of bank lending within their geographical region. Specifically, increases in bank concentration result in book leverage increases. Leverage for the country’s largest firms has a significant and complex relationship with their region’s bank concentration. The largest firms enjoy significantly higher levels of book leverage in the country’s less concentrated areas. This higher leverage disappears as concentration increases and, in the most concentrated regions, their leverage is lower than that of their counterparts. This manuscript joins the growing works in the literature claiming the existence of factors within a geographical location that counter the absence in bank competition, allowing some firms to effectively access institutional finance and mitigate some of the negative effect of banking concentration.

KEYWORDS:

• Bank concentration
• market power
• firm leverage
• profitability
• Colombia

JEL:

• G21
• R11
• O54

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Ref: Superintendencia de Sociedades de Colombia, 2022.

2 Ref: Superintendencia Financiera de Colombia, 2022.

3 Ref: Departamento Administrativo Nacional de Estadísticas de Colombia, 2022.

4 Ref: Banco de la República de Colombia, Total and target inflation, 2022; Banco de la República de Colombia, Interest rates from monetary policy, 2022; Banco de la República de Colombia, Employment and unemployment rates, 2022.

1. These are, respectively, the 1119 Decree of April 11 2008, the Conpes 3424 of May 16, 2006, and the Law 590 of July 10 2010.

2. Fixed effects corresponding to the wholesale and retail trade, manufacturing, construction, and agriculture industrial sectors are considered. These four sectors cover close to 80% of firms in the study.

3. We thank an anonymous referee for suggesting the inclusion of this subsample in the study.

Additional information

Funding

The work was supported by the Professional Staff Congress and City University of New York [64186-00 52].