Abstract
We show that competition adversely affects the specialness of bank lending. In particular, we observe that the positive abnormal return on the borrowing firm's stock after the announcement of a bank loan is reduced in US states that deregulate interstate branching.The negative effect of competition on the value of bank loans is present only for ex-ante opaque firms (i.e., firms with few tangible assets and bank-dependent borrowers) and for banks that presumably rely more on soft information (i.e., small banks).Moreover, we find that the probability of a covenant violation in a syndicated deal and charge-off rates on small business loans are higher in deregulated states. Our results suggest that competition decreases loan quality because it reduces banks' incentives to invest in information.
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