Banks' Market Power, Access to Finance, and Leverage.

The article investigates how the competitiveness of local lending markets influences the financing of new firms in the United States. Using data from the Kauffman Firm Survey (KFS), which tracks a representative cohort of new firms founded in 2004, the study finds that firms in more concentrated local lending markets—where banks have greater market power—experience reduced access to credit and lower leverage, with the most profitable firms being disproportionately affected. A theoretical contingent-claims model with monopolistically competitive banks is developed to explain these findings, highlighting how asymmetric information and banks’ fees shape firms’ capital structure and timing of credit access. Empirical tests support the model’s novel predictions, showing that higher bank fees in less competitive markets delay credit access for high-performing firms and reduce their leverage, emphasizing the role of banks’ market power as a supply-side friction that impacts firm development and economic growth.