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We evaluate how a positive, technology-driven shock to bank liquidity affects small business dynamics across different size distributions. We first show that banks receiving positive liquidity shocks increase lending to relatively larger SMEs, not to the smallest firms. This finding is consistent with the view that a positive liquidity shock enhances bank charter values, thereby reducing risk-taking incentives. Moreover, such disproportionate credit allocation leads to a crowding-out effect on micro firms. When larger SMEs grow faster and exit less because of better access to credit, their expansion stifles the development of micro firms, whose access to credit remains unchanged. (JEL G21, J21, L22)

Why did banks experience massive deposit inflows during the pandemic? We discover that deposit interest rates at bank branches in counties with higher COVID-19 infection rates fell by more than rates at branches—even branches of the same bank—in counties with lower infection rates. Credit drawdowns, national policies, such as the Payment Protection Program, and a flight-to-safety do not account for these cross-branch changes in deposit rates. Evidence suggests that higher local COVID-19 infection rates are associated with households’ greater anxiety about future job and income losses, anxiety that induces households to reduce spending and increase deposits.

What is the impact of credit conditions on family interactions and children’s human capital development? We discover that regulatory reforms that ease credit conditions are associated with (1) increases in labor demand and the employment of mothers from low-income families, (2) decreases in parent-child discussions about school, reductions in parental supervision, and increases in children’s TV watching and video game playing among low-income families, and (3) declines in the time that children spend on homework and children’s academic performance among those same families. Effective substitutes for parent-child interactions, such as grandparents living in the household, mitigate these effects.

Using proprietary loan screening data, we document that loan officers engage in “attention discrimination”: they exert less effort reviewing ex-ante disadvantage applicants, leading to higher rejection rates than otherwise justified by those applicants’ credit quality. Attention discrimination increases with the officers’ time constraints induced by quasi-random workload variations. When officer workload rises from the bottom to the top decile, they devote 70% less time to disadvantaged applicants, and the approval rate for those applicants declines by three-fifths. Our results indicate that attention constraints magnify discrimination, which provides policy implications about how to reduce discrimination in practice.

Why did banks experience massive deposit inflows during the first months of the pandemic? Using weekly branch-level data on interest rates and county-level data on COVID-19 cases, we discover that interest rates at bank branches in counties with higher COVID-19 infection rates fell by more than rates at other branches—even branches of the same bank in different counties. When differentiating weeks by the degree of stock market distress and counties by the likely impact of COVID-19 cases on economic anxiety, the evidence suggests that the deposit inflows were triggered by a surge in the supply of precautionary savings.

Why did banks experience massive deposit inflows during the first months of the pandemic? Using weekly branch-level data on interest rates and county-level data on COVID-19 cases, we discover that interest rates at bank branches in counties with higher COVID-19 infection rates fell by more than rates at other branches—even branches of the same bank in different counties. When differentiating weeks by the degree of stock market distress and counties by the likely impact of COVID-19 cases on economic anxiety, the evidence suggests that the deposit inflows were triggered by a surge in the supply of precautionary savings.

What is the impact of regulatory reforms that enhance credit market efficiency on children’s human capital? Using a parent-child panel dataset, we find that such reforms reduced children’s academic performance in low-income families. Consistent with the view that financial development entices low-income parents to substitute out of childrearing and into employment with adverse effects on children’s education, we find that among low-income families, regulatory reforms: increased mother’s employment hours, reduced parental supervision and parent-child discussions about school and college, and had bigger adverse effects when mothers were not already working full-time and grandparents were not living with the child. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We study the relationship between banks' IT capabilities and their ability to serve customers during the demand shock for digital banking services generated by the COVID-19 pandemic. Amid mobility restrictions, banks with better IT experience larger reductions in physical branch visits and larger increases in website traffic, implying a larger shift to digital banking. They also exhibit shorter reaction times in mentioning COVID-19 on their websites. Banks with better IT originate more PPP loans, especially in areas with more severe COVID-19 outbreaks, higher levels of internet use, and higher bank competition. They also attract more deposits during the pandemic. Firms more exposed to COVID-19 are more likely to switch to higher-IT banks, while banks more exposed to it are more likely to upgrade their IT.

Women’s weak bargaining power against spouses can be a hurdle to their entrepreneurship opportunities. By utilizing the state- and time-varying divorce laws in the U.S., we find that female entrepreneurship increases significantly when the divorce laws give women stronger bargaining power. This effect mainly comes from an increase in survival rate by existing business owners. The results are more pronounced for the more entrepreneurial-type of occupations, and among women who ex ante face a less friendly social environment. Overall, our results provide the first evidence that intra-household bargaining power can be an important but unstudied factor for female entrepreneurship.

In light of the human suffering and economic costs associated with mental illness, we provide the first assessment of whether local credit conditions shape the incidence of mental depression. Using several empirical strategies, we discover that bank regulatory reforms that improved local credit conditions reduced mental depression among low-income households and the impact was largest in counties dominated by bank-dependent firms. On the mechanisms, we find that the regulatory reforms boosted employment, income, and mental health among low-income individuals in bank-dependent counties, but the regulatory reforms did not increase borrowing by these individuals.

We examine how investor demand for leverage shapes asset management fees. In our model, investors' leverage demand generates a cross-section of positive fees even if all managers produce zero risk-adjusted returns. We find support for the model's novel predictions in the sample of the U.S. equity mutual funds: (1) fees increase in fund market beta precisely for beta larger than one; (2) this relation becomes stronger when leverage constraints tighten; and (3) low net alphas are especially common among high-beta funds. These results suggest that asset managers can earn fees above their risk-adjusted returns for providing their investors with leverage.

Adverse housing market events can affect credit conditions not only by hurting the financial fundamentals of banks, but may also by changing the lending behaviors of individual loan officers. In this paper, we test the latter mechanism by analyzing loan-level mortgage applications from 2008 to 2016 and utilizing a distinctive setup in the home foreclosure process: foreclosure auctions are typically held live at the county courthouse, thus making loan officers working nearby more exposed to news about the county-wise foreclosures. By comparing lending outcomes across loan applications within the same county and across branches of the same bank, we find that mortgage lending standards are more stringent when the decisions are made in bank branches next to county courthouses, resulting in higher rejection rates and smaller approved loan size. Accordingly, aggregating at the branch level, credit supply is significantly tighter at bank branches next to the courthouses relative to other branches of the same bank within the same county. We show that these effects on lending decisions and credit supply increase in the county-wise foreclosure intensity and are especially pronounced among high-risk borrowers and for branches belonging to small-sized banks. Our results are not driven by fundamental differences in borrower and branch characteristics of neighborhoods next to the courthouses and remain robust in a matched sample of branches and loan applications. Overall, our findings provide micro-level evidence that adverse news can have significant impacts on credit market outcomes by changing the risk preferences and beliefs of individual financial decision makers.

Using the NETS database, which covers the universe of establishments in the U.S., we evaluate how shocks that improve credit conditions in a county affect small businesses in that county across different size groups. We find that positive shocks to the county credit environment stimulate the growth of relatively larger firms, but crowd out micro firms. To identify county-specific shocks, we exploit technology-driven deposit shocks and bank branch networks, and compute the extent to which banks in a county receive liquidity shocks through branch networks in other counties. Consistent with the credit view, we show that banks receiving a positive liquidity shock expand credit to larger firms, but not to micro firms.