Does a Financial Crisis Impair Corporate Innovation?

Abstract We examine whether financial crises affect innovation output in the context of the 1997–98 crisis in Japan by developing the data on patent counts and future patent citations. Innovative outputs of firms that relied more heavily on bank finance fell more, and that bank dependence matters more for small firms. By employing semiparametric propensity score weighting methods, we also show that small firms which had long‐term, precrisis relationships with the failed banks exhibited a large decline in innovative outputs. The results suggest that crisis‐induced disruptions in the provision of intermediated funds reduced the innovative capacity of the opaque, bank‐dependent firms.