Foreign Bank Entry and Stock Market Stability: Insights from Staggered Regulatory Changes
55 Pages Posted: 6 Sep 2019 Last revised: 14 Nov 2019
Date Written: November 10, 2019
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 information quality and worse performances, which is supportive of a monitoring spillover effect of foreign bank penetration on the 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 market.
Keywords: Foreign Bank Entry; Stock Market Stability; Stock Price Crash; Regulatory Change; Information Quality; Monitoring Spillover Effect
JEL Classification: G38; G34; G14; M41
Suggested Citation: Suggested Citation