Bank Entry Barriers and Firms’ Risk Taking

54 Pages Posted: 16 Jul 2018 Last revised: 16 Feb 2023

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Mahsa Kaviani

University of Delaware

Hosein Maleki

Rutgers Business School - Rutgers University

Date Written: February 4, 2023

Abstract

We study how out-of-state bank entry affects non-financial firms’ risk taking. By exploiting the 1990s staggered regulatory reforms across U.S. states that allowed interstate banking and branching, we show that out-of-state bank entry reduced borrowers’ risk taking. Easier bank entry lowered borrowers’ risk taking by (1) eroding borrowers’ ability to commit to long-term relationships with incumbent banks, and (2) making cheap credit available from new entrants. Large banks that entered previously protected states offered larger loans and lower interest rates, inducing large geographically diversified firms to sign up as new clients. We argue that these large banks were able to substitute for local relationship lending with more information collection from branches in multiple states. Firms switching borrowers increased capital expenditures and kept R&D expenses stable but reduced R&D risk.

Keywords: barriers to entry, bank competition, corporate risk taking, matching, investment

JEL Classification: G28, G32, G21

Suggested Citation

Basu, Sudipta and Kaviani, Mahsa and Maleki, Hosein, Bank Entry Barriers and Firms’ Risk Taking (February 4, 2023). 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

University of Delaware ( email )

20 Orchard Rd, Newark, DE
Newark, DE 19716
United States

Hosein Maleki (Contact Author)

Rutgers Business School - Rutgers University ( email )

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