Bank Entry Barriers and Firms’ Risk Taking

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