Foreign Bank Entry Deregulation and Stock Market Stability: Evidence from Staggered Regulatory Changes
61 Pages Posted: 6 Sep 2019 Last revised: 15 Mar 2022
Date Written: March 10, 2022
Exploring staggered quasi-exogenous regulatory changes in China, we find that the foreign bank entry deregulation significantly reduces the likelihood of stock price crashes of domestic listed firms. The effect is more pronounced among firms with worse ex-ante agency problems and performance, consistent with a monitoring spillover effect from foreign banks. Supportive evidence suggests that foreign bank entry reduces overall financing costs and extends loan maturity. Domestic firms’ corporate governance, fundamentals, and stock price efficiency improve as well. Overall, our findings highlight an unexplored role of the banking sector deregulation in curtailing stock price crash risks and improving the stability of stock markets.
Keywords: Foreign Bank Entry Deregulation; Stock Price Crash; Regulatory Change; Corporate Governance; Monitoring Spillover Effect; Stock Market Stability
JEL Classification: G38; G34; G14; M41
Suggested Citation: Suggested Citation