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Bank deregulation and stock price crash risk

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  • Dang, Viet Anh
  • Lee, Edward
  • Liu, Yangke
  • Zeng, Cheng

Abstract

This paper examines the influence of bank branch deregulation on corporate borrowers' stock price crash risk. Using a large sample of U.S. public firms over the period 1962–2001, we provide robust evidence that intrastate branch reform contributes to the reduction of firms' stock price crash risk. Further analysis shows that the negative relation between bank branch deregulation and crash risk is more pronounced among firms that are more dependent on external finance and lending relationships, as well as firms that have weaker corporate governance and greater financial constraints. Our findings are consistent with the notion that bank branch reform improves bank monitoring efficiency, thereby reducing borrowing firms' bad news formation and hoarding, and hence their stock price crash risk. Overall, our empirical evidence suggests that, as a reform aimed at removing restrictions on bank branch expansion, bank deregulation also helps protect shareholders' wealth.

Suggested Citation

  • Dang, Viet Anh & Lee, Edward & Liu, Yangke & Zeng, Cheng, 2022. "Bank deregulation and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:corfin:v:72:y:2022:i:c:s0929119921002704
    DOI: 10.1016/j.jcorpfin.2021.102148
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    Keywords

    Bank deregulation; Stock price crash risk; Monitoring; Bad news hoarding; Bad news formation;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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