Competition and Banks’ Cost of Equity Capital: Evidence from Relatively Exogenous Differences in Regulation

57 Pages Posted: 3 Dec 2018

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Raluca A. Roman

Federal Reserve Bank of Philadelphia

Date Written: November 26, 2018

Abstract

We examine the effects of competition on banks’ cost of equity (COE). We use relatively exogenous differences across states and over time in interstate bank branching restrictions over the post–Riegle-Neal period, 1994:Q4–2016:Q4. We find robust evidence that competition raises banks’ COE. This is driven by active acquirers, suggesting that market aggressors – rather than those subject to more competition from their aggression – suffer significantly higher COE. The channel for these effects is higher risk. Results are robust to a battery of tests, including instrumental variables. The findings are stronger during the banking crisis of 2007:Q3–2009:Q4.

Keywords: Banking, Competition, Deregulation, Cost of Equity Capital, Weighted Average Cost of Capital, Risk, Acquisitions, M&As

JEL Classification: G21, G28, G34

Suggested Citation

Berger, Allen N. and El Ghoul, Sadok and Guedhami, Omrane and Roman, Raluca A., Competition and Banks’ Cost of Equity Capital: Evidence from Relatively Exogenous Differences in Regulation (November 26, 2018). Available at SSRN: https://ssrn.com/abstract=3290940 or http://dx.doi.org/10.2139/ssrn.3290940

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Sadok El Ghoul

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Raluca A. Roman (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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