Foreign Bank Entry Deregulation and Stock Market Stability: Evidence from Staggered Regulatory Changes

61 Pages Posted: 6 Sep 2019 Last revised: 15 Mar 2022

See all articles by Tse-Chun Lin

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Jinyu Liu

University of International Business and Economics (UIBE) - School of Banking and Finance

Xiaoran Ni

Xiamen University - School of Economics; Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Date Written: March 10, 2022

Abstract

Exploring staggered quasi-exogenous regulatory changes in China, we find that the foreign bank entry deregulation significantly reduces the likelihood of stock price crashes of domestic listed firms. The effect is more pronounced among firms with worse ex-ante agency problems and performance, consistent with a monitoring spillover effect from foreign banks. Supportive evidence suggests that foreign bank entry reduces overall financing costs and extends loan maturity. Domestic firms’ corporate governance, fundamentals, and stock price efficiency improve as well. Overall, our findings highlight an unexplored role of the banking sector deregulation in curtailing stock price crash risks and improving the stability of stock markets.

Keywords: Foreign Bank Entry Deregulation; Stock Price Crash; Regulatory Change; Corporate Governance; Monitoring Spillover Effect; Stock Market Stability

JEL Classification: G38; G34; G14; M41

Suggested Citation

Lin, Tse-Chun and Liu, Jinyu and Ni, Xiaoran, Foreign Bank Entry Deregulation and Stock Market Stability: Evidence from Staggered Regulatory Changes (March 10, 2022). Available at SSRN: https://ssrn.com/abstract=3445520 or http://dx.doi.org/10.2139/ssrn.3445520

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Jinyu Liu (Contact Author)

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street, Chaoyang District
Beijing, 100029
China

Xiaoran Ni

Xiamen University - School of Economics ( email )

D204
Economic Building
Xiamen, Fujian 361005
China

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

Xiamen
China

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