Review of Finance 2026
Creation After Destruction? Financial Intermediation and Firm Entry After Bank Cleanups
Abstract
We study a large and unanticipated bank cleanup in India after prolonged zombie lending under regulatory forbearance. The cleanup forced widespread zombie exits through bankruptcy. In contrast to a frictionless world where entry automatically follows exit, we show that with financial frictions, local banking conditions shape creation after destruction. New firm entry occurs primarily in regions where banks are present, well-capitalized, competitive, and possess sectoral expertise. We further find a decline in the dispersion of total factor productivity in regions with stronger financial intermediation, consistent with a reduction in misallocation in such areas.
- DOI
- 10.1093/rof/rfag045
- Language
- en
- Sources
- crossref openalex