Does Banking Competition Affect Innovation? Abstract: This study investigates whether banking competition affects innovation by exploiting the deregulation of interstate bank branching laws. We find that banking competition reduces state-level innovation by public corporations headquartered in deregulating states. Innovation increases among private firms that rely on external finance and have limited access to local bank credit. We argue that banking competition enables small, innovative firms to secure financing instead of being acquired by public corporations, reducing the supply of innovative targets and thus decreasing state-level innovation attributable to public corporations. These results highlight the real effects of banking competition and the determinants of innovation. Keywords: Banking competition, Innovation, Access to finance, External finance dependence, Mergers and acquisitions, Economic growth Introduction: Innovation is driven by various factors, including company and market characteristics. This study examines the effects of state-level banking competition on innovation. We use the staggered deregulation of interstate bank branching laws in the U.S. to address endogeneity concerns. We find that banking competition reduces innovation by public corporations but increases innovation by private firms. This is because private firms can benefit from improved credit conditions to finance innovative projects. We also find that the negative effect of banking competition on innovation is driven by public corporations, as they are more likely to acquire small, innovative firms. Empirical Results: We find that states with more open interstate branching laws generate fewer patents and citations three years after deregulation. This effect is driven by public corporations, which are more likely to acquire small, innovative firms. Private firms, however, experience increases in innovation output following deregulation. We also find that the negative effect of banking competition on innovation is driven by public corporations, as they are more likely to acquire small, innovative firms. This reduction in the supply of innovative targets leads to a decrease in corporate innovation. Mechanisms: We explore possible mechanisms through which banking competition affects innovation. We find that external finance dependence, prior banking relationships, and acquisitions of private, innovative firms by public corporations are possible underlying mechanisms. We find that external finance-dependent firms benefit from improved credit conditions to finance innovative projects. We also find that public corporations are more likely to acquire small, innovative firms, which reduces the supply of innovative targets and thus decreases corporate innovation. Conclusion: Our findings suggest that banking competition has a negative effect on state-level innovation, primarily driven by public corporations. This is because public corporations are more likely to acquire small, innovative firms, reducing the supply of innovative targets and thus decreasing corporate innovation. The results highlight the real effects of banking competition and the determinants of innovation.Does Banking Competition Affect Innovation? Abstract: This study investigates whether banking competition affects innovation by exploiting the deregulation of interstate bank branching laws. We find that banking competition reduces state-level innovation by public corporations headquartered in deregulating states. Innovation increases among private firms that rely on external finance and have limited access to local bank credit. We argue that banking competition enables small, innovative firms to secure financing instead of being acquired by public corporations, reducing the supply of innovative targets and thus decreasing state-level innovation attributable to public corporations. These results highlight the real effects of banking competition and the determinants of innovation. Keywords: Banking competition, Innovation, Access to finance, External finance dependence, Mergers and acquisitions, Economic growth Introduction: Innovation is driven by various factors, including company and market characteristics. This study examines the effects of state-level banking competition on innovation. We use the staggered deregulation of interstate bank branching laws in the U.S. to address endogeneity concerns. We find that banking competition reduces innovation by public corporations but increases innovation by private firms. This is because private firms can benefit from improved credit conditions to finance innovative projects. We also find that the negative effect of banking competition on innovation is driven by public corporations, as they are more likely to acquire small, innovative firms. Empirical Results: We find that states with more open interstate branching laws generate fewer patents and citations three years after deregulation. This effect is driven by public corporations, which are more likely to acquire small, innovative firms. Private firms, however, experience increases in innovation output following deregulation. We also find that the negative effect of banking competition on innovation is driven by public corporations, as they are more likely to acquire small, innovative firms. This reduction in the supply of innovative targets leads to a decrease in corporate innovation. Mechanisms: We explore possible mechanisms through which banking competition affects innovation. We find that external finance dependence, prior banking relationships, and acquisitions of private, innovative firms by public corporations are possible underlying mechanisms. We find that external finance-dependent firms benefit from improved credit conditions to finance innovative projects. We also find that public corporations are more likely to acquire small, innovative firms, which reduces the supply of innovative targets and thus decreases corporate innovation. Conclusion: Our findings suggest that banking competition has a negative effect on state-level innovation, primarily driven by public corporations. This is because public corporations are more likely to acquire small, innovative firms, reducing the supply of innovative targets and thus decreasing corporate innovation. The results highlight the real effects of banking competition and the determinants of innovation.