Does Finance Promote New Firm Creation and Growth? Evidence from regional data in Japan

This study examines how regional financial development influences new firm creation and growth in Japan. Using prefecture–year panel data from 2007 to 2023, we distinguish between regional equity and debt capital, proxied by the number of investment limited partnerships and bank branches, respectively. We find that regions with greater equity capital have more newly founded firms and initial public offerings, and provide suggestive evidence of stronger sales growth among young firms (firms within five years of establishment), whereas regional debt capital has no significant effect. Moreover, regional equity capital is associated with higher employment shares of medium- and large-sized young firms and lower shares of small ones, implying that regional equity capital promotes a compositional shift in new firm creation toward larger entrants. These findings are robust to potential endogeneity concerns and to alternative measures of financial development.