Bank Competition and Firms' Risk-Taking

55 Pages Posted: 16 Jul 2018 Last revised: 20 Apr 2019

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Mahsa Kaviani

Temple University - Department of Finance

Hosein Maleki

Temple University, Fox School of Business

Date Written: June 1, 2017

Abstract

We examine whether and how bank competition influences non-financial firms' risk-taking. Using the staggered timing of banking deregulation across U.S. states starting in the mid-1990s, we show that an increase in bank competition reduces the risk-taking of non-financial firms. Two major changes in the banking industry can explain our results: weakened firm-bank relationships and borrowers' lower risk-taking incentives in response to the availability of cheaper credit. While capital expenditures and asset growth increase after banking deregulation, R\&D expenses remain unchanged, consistent with a tilt towards less risky investments. The effect is stronger for firms that are smaller, less transparent, and more reliant on bank financing. Firms that borrow predominantly from out-of-state banks after banking deregulation reduce risk-taking more.

Keywords: bank competition, corporate risk-taking, relationship lending, investment

JEL Classification: G28, G32, G21

Suggested Citation

Basu, Sudipta and Kaviani, Mahsa and Maleki, Hosein, Bank Competition and Firms' Risk-Taking (June 1, 2017). Fox School of Business Research Paper No. 17-024. Available at SSRN: https://ssrn.com/abstract=3002895 or http://dx.doi.org/10.2139/ssrn.3002895

Sudipta Basu

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Mahsa Kaviani

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

Hosein Maleki (Contact Author)

Temple University, Fox School of Business ( email )

Philadelphia, PA 19122
United States

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