Bank Entry Barriers and Firms’ Risk Taking

Abstract

We study how out-of-state bank entry affects non-financial firms’ risk taking. By exploiting staggered regulatory reforms across U.S. states that allowed interstate banking and branching, we show that higher out-of-state bank entry significantly reduced borrowers’ risk taking. After large banks’ entry, firms located in deregulated states increased capital expenditures and maintained stable R&D expenses but reduced R&D risk. The risk-taking decline was concentrated in operating accruals. Easier bank entry lowered borrowers’ risk taking by (1) eroding borrowers’ ability to commit to long-term relationships with incumbent banks, and (2) increasing the availability of cheap credit from new entrants.

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

JEL Classification: G28, G32, G21