Please use this identifier to cite or link to this item:

Do banks influence stock crash risk? Evidence from banking deregulation

File Size Format  
HARC 2020 paper 236.pdf 506.51 kB Adobe PDF View/Open

Item Summary

Title:Do banks influence stock crash risk? Evidence from banking deregulation
Authors:Jeong-Bon Kim
Chong Wang
Feng Wu
Keywords:Interstate branching deregulation
Stock crash risk
Bad news hoarding
Date Issued:31 Aug 2019
Abstract:An extensive literature shows that managers’ withholding of bad news, an agency problem in corporate governance, plausibly causes stock price crashes. This literature, however, has not examined whether and how lending banks influence borrowing firms’ crash risk, despite banks’ advantageous role in corporate governance via their monitoring and funding functions. We fill this void in this study. To mitigate endogeneity, we exploit the staggered reforms in U.S. state-level banking markets that gradually lift barriers for interstate branching. These deregulation events, which are exogenous to firms, represent historically important shocks to bank competition, and bank competition can fundamentally alter bank monitoring and funding behaviors. We find robust evidence that bank competition reduces firm crash risk, and the effect is stronger in scenarios in which bank monitoring and funding are likely to exert greater influences. Bank competition also mitigates abrupt divulgence of adverse information, suppresses earnings management, and improves reporting quality, which helps explain the decline in crash risk.
Appears in Collections: 05 Financial: Debt Market Research (Including Credit Ratings/Debt Contracts)

Please email if you need this content in ADA-compliant format.

Items in ScholarSpace are protected by copyright, with all rights reserved, unless otherwise indicated.