Relaxing the Financial Constraint: The Impact of Banking Sector Reform on Firm Performance

We examine the impact of banking reform and financial crisis of 2001 on nonfinancial firm dynamics. Our analysis integrates the two lines of literature on financial liberalization, banking reform and access to capital and banking competition, which were addressed earlier by Bertrand, Schoar and Thesmar (2007) and Cetorelli and Strahan (2006). Our unique firm level survey data from Turkey* sheds light on market structure and firm performance. We find that increased banking competition for credit along with banking concentration and financial crisis severely affects access to capital. Moreover, this effect is more pronounced with varying firm size. *We use confidential firm level survey data on balance sheets, income statements and employment that are collected by the Central Bank of Turkey over non-financial firms with special permission. The period of analysis is 1995 – 2007 on an annual frequency. Data covers on average 7478 firms over the sample period.