Bank deregulation and stock price crash risk

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Netherlands), 2022-02, Vol.72, p.102148, Article 102148
• Main Authors: Dang, Viet Anh, Lee, Edward, Liu, Yangke, Zeng, Cheng
• Format: Article
• Language: English
• Subjects: Bad news formation; Bad news hoarding; Bank deregulation; Monitoring; Stock price crash risk
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2021.102148

This paper examines the influence of bank branch deregulation on corporate borrowers' stock price crash risk. Using a large sample of U.S. public firms over the period 1962–2001, we provide robust evidence that intrastate branch reform contributes to the reduction of firms' stock price crash risk. Further analysis shows that the negative relation between bank branch deregulation and crash risk is more pronounced among firms that are more dependent on external finance and lending relationships, as well as firms that have weaker corporate governance and greater financial constraints. Our findings are consistent with the notion that bank branch reform improves bank monitoring efficiency, thereby reducing borrowing firms' bad news formation and hoarding, and hence their stock price crash risk. Overall, our empirical evidence suggests that, as a reform aimed at removing restrictions on bank branch expansion, bank deregulation also helps protect shareholders' wealth. •We study the relation between intrastate bank deregulation and corporate borrowers' stock price crash risk.•We find that bank branch reform has a negative effect on firms' crash risk.•The effect is more pronounced for firms more dependent on external finance and lending relationships.•The result is also stronger for firms with weaker corporate governance and greater financial constraints.•Our findings are consistent with enhanced bank monitoring post-reform reducing firms' bad news formation and hoarding.