Deregulation and Banks’ Cost of Equity Capital
60 Pages Posted: 3 Dec 2018 Last revised: 10 Sep 2021
Date Written: September 10, 2020
We examine the effects of geographic deregulation on banks’ cost of equity (COE) using changes in interstate bank branching laws over the post–Riegle-Neal period (1994:Q4–2016:Q4). We find strong evidence that deregulation increases banks’ COE. This is driven primarily by active acquirers, rather than those subject to increased competition from these acquirers. We identify higher risk-taking as an important channel for these findings. The results support our new acquisitions–fragility view, rather than the traditional competition–fragility view. Results are robust to instrumental variables, accounting for secular trends, and alternative explanations.
Keywords: Bank Deregulation, Cost of Equity Capital, Risk, Acquisitions, M&As, Market Discipline.
JEL Classification: G21, G28, G34
Suggested Citation: Suggested Citation