Competition and Banks’ Cost of Equity Capital: Evidence from Relatively Exogenous Differences in Regulation
57 Pages Posted: 3 Dec 2018
Date Written: November 26, 2018
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: Suggested Citation