Bank Competition and Firms' Risk-Taking

63 Pages Posted: 16 Jul 2018 Last revised: 7 Oct 2019

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Mahsa Kaviani

Temple University - Department of Finance

Hosein Maleki

Temple University, Fox School of Business

Date Written: September 1, 2019

Abstract

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

Basu, Sudipta and Kaviani, Mahsa and Maleki, Hosein, Bank Competition and Firms' Risk-Taking (September 1, 2019). 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

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

Hosein Maleki (Contact Author)

Temple University, Fox School of Business ( email )

Philadelphia, PA 19122
United States

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