In this paper we posit and empirically demonstrate that the structure of a economy's financial system impacts its industry structure through its influence on the allocation of credit to firms within and across industries. We exploit variation in domestic banks' ability to compete with out-of-state entrants at the time of interstate deregulation across U.S. states to generate significant changes to the structure of financial system - market share of out-of-state banks - in an economy. We then use within-state, cross-sectional variation at the bank level, at the industry level, and at the firm level to test our hypothesis. Following deregulation, arm's length out-of-state capital crowds out domestic lending in economies with weak domestic banking sector. In contrast, there is an increase in the aggregate supply of credit in economies with more competitive domestic banks. We show that these differential changes in financial structure significantly affect the allocation of credit. There is a higher growth rate and lower growth volatility for industry sectors in economies with more competitive domestic banks. These results are driven by more credit owing to industries that are reliant on external financing and to opaque firms. In contrast, industry growth is lower and growth volatility is higher in economies with uncompetitive domestic banks. These results are driven by less credit ow to more externally finance dependent industries and opaque firms. Thus, the timing of deregulation of credit markets interacts with the development of the incumbent domestic banking sector, and the change in financial structure it induces has implications on the allocation of credit and economic growth.

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The typical 20th-century firm was capital-intensive and competed on cost efficiency. The 21st-century firm is different. Competitive success increasingly depends on product quality, which in turn hinges on intangible assets such as brand strength, innovation, and corporate culture. Unlike tangible investment such as buying a factory, the fruits of intangible investment may take several years to appear. A manager pressured to maximise short-term earnings may fail to invest, jeopardising the long-term future of his firm. This project will study the determinants and consequences of long-term investment through three linked components. Financial Markets. The traditional view is that financial markets dissuade investment by forcing firms to cater to short-term shareholders. I will study two channels through which markets promote investment. First, traders gather information about a firm’s past investments and incorporate it into stock prices by trading - rewarding the manager for good investment. Second, traders can gather information about a firm’s future investment opportunities - informing the manager about his future investment decisions. I aim to analyse what determines the efficiency of both channels. Incentives. Most research on incentives focuses on either the level of pay, or the sensitivity of pay to performance, but it is the horizon of incentives that is key to promoting investment. I will theoretically analyse the optimal incentive horizon, and empirically demonstrate how it affects long-term decisions. Moving beyond managers, I will study how to incentivise teachers to focus on their pupils’ long-run development rather than “teaching-to-the-test.” Effects of Investment. A key to inducing long-run investment is to demonstrate its benefits, but this is difficult due to data availability. I aim to gather data on a firm’s corporate social responsibility – its investment in its stakeholders – and link it to firm value.

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