Bank Competition and Firms' Risk-Taking
63 Pages Posted: 16 Jul 2018 Last revised: 7 Oct 2019
Date Written: September 1, 2019
Research shows that bank competition affects general economic and banking-related outcomes, but much less is known about how it impacts firms' risk-taking. By exploiting staggered regulatory reforms across different U.S. states, we show that bank competition significantly reduces borrowers' risk-taking. In response to bank competition, firms invest in more capital-intensive but less risky projects: they increase capital expenditures and maintain stable R&D expenses, while reducing R&D risk. We also find that the decline in risk-taking is concentrated in operating accruals’ volatility. Bank competition motivates lower borrowers' risk-taking through two mechanisms: (1) eroding borrowers' ability to commit to long-term relationship with banks, and (2) increasing the availability of cheaper credit. Further, risk reduction is more pronounced for firms that are more bank-dependent, smaller, less transparent, and receive cheaper loans after the regulatory reforms.
Keywords: bank competition, corporate risk-taking, investment
JEL Classification: G28, G32, G21
Suggested Citation: Suggested Citation