Political uncertainty and the geographic allocation of credit: Evidence from small businesses
We investigate how banks change the geographic distribution of their small business loan
portfolio when they face political uncertainty in some of the states where they operate. Using
exogenous variation in gubernatorial elections with binding term limits, we show that political
uncertainty causes local banks to increase out-of-state lending to small firms, especially to
firms located in the wealthiest out-of-state counties. The increase in credit availability in turn
leads to an increase in employment growth and net firm creation in sectors that need larger
amounts of startup capital. Our results indicate that geographic diversification and financial
integration enable banks to sidestep the negative local economic effects of political uncertainty.