Bank Competition: Measurement, Decision-Making, and Risk-Taking

68 Pages Posted: 30 Jun 2014 Last revised: 5 Jan 2016

See all articles by Robert M. Bushman

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Bradley E. Hendricks

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Christopher D. Williams

University of Michigan, Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2015

Abstract

This paper investigates whether greater competition increases or decreases individual bank and banking system risk. Using a new text-based measure of competition, and an instrumental variables analysis that exploits exogenous variation in bank deregulation, we provide robust evidence that greater competition increases both individual bank risk and a bank’s contribution to system-wide risk. Specifically, we find that higher competition is associated with lower underwriting standards, less timely loan loss recognition, and a shift towards non-interest revenue. Further, we find that higher competition is associated with higher stand-alone risk of individual banks, greater sensitivity of a bank’s downside equity risk to system-wide distress, and a greater contribution by individual banks to downside risk of the banking sector.

Keywords: banking, competition, stability, financial statement analysis, regulation, contracting, timely loss recognition

JEL Classification: G2, H32, L00, M4

Suggested Citation

Bushman, Robert M. and Hendricks, Bradley E. and Williams, Christopher D., Bank Competition: Measurement, Decision-Making, and Risk-Taking (December 1, 2015). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2460371 or http://dx.doi.org/10.2139/ssrn.2460371

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

Bradley E. Hendricks

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
(919) 962-3619 (Phone)

Christopher D. Williams (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
(734)647-2842 (Phone)

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