Bank Competition and Information Production
37 Pages Posted: 16 Oct 2019
Date Written: October 7, 2019
We show that competition adversely affects information production in the banking industry. In particular, we observe that the positive abnormal return associated with the announcement of a bank loan is reduced in US states that deregulate interstate branching. The negative effect of competition on information production is present only for informationally opaque firms (i.e., firms with few tangible assets and bank-dependent borrowers) and for banks that rely more on "soft" information (i.e., small banks). Moreover, we find that charge-off rates on small business loans are higher in deregulated states. Our results suggest that competition decreases loan quality because it reduces banks' incentives to invest in information.
Keywords: asymmetric information, competition, bank deregulation,syndicated loans, stock returns
JEL Classification: G21, G28
Suggested Citation: Suggested Citation