Geographic Deregulation and Banks’ Cost of Equity Capital

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

Berger, Allen N. and El Ghoul, Sadok and Guedhami, Omrane and Roman, Raluca A., Geographic Deregulation and Banks’ Cost of Equity Capital (September 10, 2020). Journal of International Money and Finance, Available at SSRN: https://ssrn.com/abstract=3290940 or http://dx.doi.org/10.2139/ssrn.3290940