Whom you borrow from matters: universal banks and firm innovation

Purpose: The purpose of this paper is to empirically investigate universal banks as an important source of external funding and their effects on borrowing firms’ innovation outputs. Design/methodology/approach: The authors employ regression analyses including a difference-in-difference approach and a two-sided matching method to ensure the robustness of the findings. The authors further explore some potential channels and boundary conditions for the main findings. Findings: The authors find that borrowing from universal banks is negatively associated with the quantity of firm innovation, but not the quality of firm innovation. The authors document that borrowing firms reduce their R&D expenditures and rely more on external partners to produce innovation outputs after loan originations from universal banks. The negative relation between universal bank lending and the quantity of firm innovation is more prominent for unrelated innovation and for financially constrained firms. Research limitations/implications: The evidence reveals that universal banks may use their informational advantage and market power to limit their corporate borrowers’ investment in innovation activities. Originality/value: The paper extends the line of research on the source of financing and firm innovation, and establishes a robust relationship between capital market and product market.