Foreign Bank Entry and Stock Market Stability: Insights from Staggered Regulatory Changes
62 Pages Posted: 6 Sep 2019 Last revised: 7 Mar 2020
Date Written: March 5, 2020
Exploring staggered quasi-exogenous regulatory changes in China, we find that banking sector FDI significantly reduces the likelihood of stock price crashes of domestic listed firms. The effect is more pronounced among firms with ex-ante lower disclosure quality and worse performances, which indicates a monitoring spillover effect of foreign bank penetration on domestic firms. Moreover, we find evidence of reduced overall financing costs and extended loan maturity after foreign bank entry. Our findings highlight an unexplored role of the banking sector marketization in terms of curtailing stock price crash risks and improving the stability of stock markets.
Keywords: Foreign Bank Entry; Stock Market Stability; Stock Price Crash; Regulatory Change; Information Quality; Monitoring Spillover Effect
JEL Classification: G38; G34; G14; M41
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