When banks fight harder for corporate clients, businesses actually cut their R&D spending just to make their profits look better on paper.
SSRN · March 17, 2026 · 6427642
The Takeaway
Increasing the supply of credit is usually seen as a boost for business, but this study found a hidden downside: intense bank competition makes firms more 'short-sighted.' To look attractive to competing lenders, companies slash their future-looking spending on projects like R&D just to hit the short-term profit numbers that banks want to see.
From the abstract
Using the staggered adoption of interstate bank deregulation across U.S. states (1978–1994) as a quasi-natural experiment, we find that increased bank competition significantly influences corporate earnings management. Difference-in-differences estimates indicate that, following financial deregulation, firms engage more in income-increasing real earnings management by reducing abnormal discretionary expenditures while reliance on income-increasing discretionary accruals decreases or remains unch