Financial market discipline and new business formation

Abstract

Abstract This study examines the effect of public disclosure of financial misconduct in the retail banking industry on the real economy. We propose that strengthened public disclosure of misconduct imposes disciplinary pressure which improves services and intermediation in the retail financial sector and that it ultimately benefits the local economy. Using a large dataset of public complaints about financial misconduct, we find a positive relationship between the intensity of public disclosure and new business formation in the local community. We also find such a market discipline avenue complements the role of social trust in improving the local entrepreneurial ecosystem.