Bank Deregulation and Stock Price Crash Risk

Abstract

This paper examines the relation between bank branch deregulation and 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 reduces firms’ stock price crash risk. Our finding is consistent with the notion that branch reform improves banks’ monitoring efficiency, thus allowing them to better constrain borrowing firms’ bad-news-hoarding behavior. Further analysis shows that the negative relation between bank branch deregulation and stock price crash risk is more pronounced among firms that are more dependent on external finance and lending relationships. Overall, our results suggest that, as a reform aimed at removing restrictions on bank branch expansion, bank deregulation also helps protect shareholders’ wealth.