Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-24T18:47:16.307Z Has data issue: false hasContentIssue false
  • English
  • Français

Bank Competition and Information Production

Published online by Cambridge University Press:  23 February 2024

Filippo De Marco Open the ORCID record for Filippo De Marco [Opens in a new window]  and
Silvio Petriconi
Filippo De Marco*
Affiliation:
Bocconi University, Baffi-Carefin, IGIER and CEPR
Silvio Petriconi
Affiliation:
Catolica Lisbon School of Business and Economics
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We show that bank competition diminishes banks’ incentives to produce information about prospective borrowers. We exploit the deregulation of U.S. interstate branching as a shock to competition and use borrowers’ stock returns after loan announcements to measure bank information production. Positive loan announcement returns are reduced in states that deregulate interstate branching, especially for opaque and bank-dependent firms and smaller banks that rely on soft information. Existing (i.e., inside) banks reduce information production more than new (i.e., outside) banks after deregulation, suggesting that they do so to deter borrower poaching. Furthermore, the probability of a covenant violation increases following deregulation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 7 , November 2024 , pp. 3479 - 3499
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

The authors are grateful to an anonymous referee, Tobias Berg, Paolo Colla, Jean Edouard Colliard, Mara Faccio (the editor), Balint Horvath, Ivan Ivanov, Gyoengyi Loranth, Ralf Meisenzahl, Florian Nagler, Steven Ongena, Alberto Pozzolo, Farzad Saidi, Sascha Steffen, Daniel Streitz, and seminar participants at Banca d’Italia, Bocconi University, Frankfurt School, IWH Halle, Knut-Wicksell Conference on Financial Intermediation and University of Vienna for helpful comments and suggestions. Edoardo Leonardi and Luca Pennarola provided excellent research assistance at an early stage of the project. The authors also gratefully acknowledge the financial support from the Baffi Carefin Center.

References

Asriyan, V.; Laeven, L.; and Martin, A.. “Collateral Booms and Information Depletion.” Review of Economic Studies, 89 (2022), 517–555.CrossRefGoogle Scholar
Baker, A. C.; Larcker, D. F.; and Wang, C. C.. “How Much Should We Trust Staggered Difference-in-Differences Estimates?” Journal of Financial Economics, 144 (2022), 370–395.CrossRefGoogle Scholar
Berger, A.; Miller, N.; Petersen, M.; Rajan, R.; and Stein, J.. “Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks.” Journal of Financial Economics, 76 (2005), 237–269.CrossRefGoogle Scholar
Billett, M.; Flannery, M.; and Garfinkel, J.. “The Effect of Lender Identity on a Borrowing Firm’s Equity Return.” Journal of Finance, 50 (1995), 699–718.CrossRefGoogle Scholar
Bisetti, E.; Karolyi, S.; and Lewellen, S.. “The Blessing and Curse of Deregulation.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3475458 (2020).Google Scholar
Boyd, J., and De Nicoló, G.. “The Theory of Bank Risk Taking and Competition Revisited.” Journal of Finance, 60 (2005), 1329–1343.CrossRefGoogle Scholar
Cao, Q.; Di Pietro, M.; Kokas, S.; and Minetti, R.. “Liquidity and Discipline. Bank Due Diligence Over the Business Cycle.” Journal of the European Economic Association, 20 (2022), 2136–2180.CrossRefGoogle Scholar
Carlson, M.; Correia, S.; and Luck, S.. “The Effects of Banking Competition on Growth and Financial Stability: Evidence from the National Banking Era.” Journal of Political Economy, 130 (2022), 462–520.CrossRefGoogle Scholar
Célérier, C., and Matray, A.. “Bank-Branch Supply, Financial Inclusion, and Wealth Accumulation.” Review of Financial Studies, 32 (2019), 4767–4809.CrossRefGoogle Scholar
Cengiz, D.; Dube, A.; Lindner, A.; and Zipperer, B.. “The Effect of Minimum Wages on Low-Wage Jobs.” Quarterly Journal of Economics, 134 (2019), 1405–1454.CrossRefGoogle Scholar
Cetorelli, N., and Strahan, P.. “Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets.” Journal of Finance, 61 (2006), 437–461.CrossRefGoogle Scholar
Chava, S., and Purnanandam, A.. “The Effect of Banking Crisis on Bank-Dependent Borrowers.” Journal of Financial Economics, 99 (2011), 116–135.CrossRefGoogle Scholar
Chava, S., and Roberts, M.. “How Does Financing Impact Investment? The Role of Debt Covenants.” Journal of Finance, 63 (2008), 2085–2121.CrossRefGoogle Scholar
Dell’Ariccia, G., and Marquez, R.. “Lending Booms and Lending Standards.” Journal of Finance, 61 (2006), 2511–2546.CrossRefGoogle Scholar
Demerjian, P., and Owens, E.. “Measuring the Probability of Financial Covenant Violation in Private Debt Contracts.” Journal of Accounting and Economics, 61 (2016), 433–447.CrossRefGoogle Scholar
Diamond, D. “Monitoring and Reputation: The Choice Between Bank Loans and Directly Placed Debt.” Journal of Political Economy, 99 (1991), 689–721.CrossRefGoogle Scholar
Eckbo, E. “Valuation Effects of Corporate Debt Offerings.” Journal of Financial Economics, 15 (1986), 119–151.CrossRefGoogle Scholar
Fama, E., and French, K.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Fama, E. F., and French, K. R.. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics, 116 (2015), 1–22.CrossRefGoogle Scholar
Fields, L.; Fraser, D.; Berry, T.; and Byers, S.. “Do Bank Loan Relationships Still Matter?” Journal of Money, Credit and Banking, 38 (2006), 1195–1209.CrossRefGoogle Scholar
Focarelli, D.; Pozzolo, A.; and Casolaro, L.. “The Pricing Effect of Certification on Syndicated Loans.” Journal of Monetary Economics, 55 (2008), 335–349.CrossRefGoogle Scholar
Friewald, N.; Nagler, F.; and Wagner, C.. “Debt Refinancing and Equity Returns.” Journal of Finance, 77 (2022), 2287–2329.CrossRefGoogle Scholar
Gissler, S.; Ramcharan, R.; and Yu, E.. “The Effects of Competition in Consumer Credit Markets.” Review of Financial Studies, 33 (2020), 5378–5415.CrossRefGoogle Scholar
Goodman-Bacon, A. “Difference-in-Differences with Variation in Treatment Timing.” Journal of Econometrics, 225 (2021), 254–277. Themed Issue: Treatment Effect 1.CrossRefGoogle Scholar
Gorton, G., and Ordonez, G.. “Good Booms, Bad Booms.” Journal of the European Economic Association, 18 (2018), 618–665.CrossRefGoogle Scholar
Granja, J.; Leuz, C.; and Rajan, R.. “Going the Extra Mile: Distant Lending and Credit Cycles.” Journal of Finance, 77 (2022), 1259–1324.CrossRefGoogle Scholar
Gustafson, M. T.; Ivanov, I. T.; and Meisenzahl, R. R.. “Bank Monitoring: Evidence from Syndicated Loans.” Journal of Financial Economics, 139 (2021), 452–477.CrossRefGoogle Scholar
Hale, G., and Santos, J.. “Do Banks Price Their Informational Monopoly?” Journal of Financial Economics, 93 (2009), 185–206.CrossRefGoogle Scholar
Ioannidou, V., and Ongena, S.. “Time for a Change: Loan Conditions and Bank Behavior When Firms Switch Banks.” Journal of Finance, 65 (2010), 95–115.Google Scholar
Ivashina, V. “Asymmetric Information Effects on Loan Spreads.” Journal of Financial Economics, 92 (2009), 300–319.CrossRefGoogle Scholar
James, C. “Some Evidence on the Uniqueness of Bank Loans.” Journal of Financial Economics, 19 (1987), 217–235.CrossRefGoogle Scholar
Jayaratne, J., and Strahan, P.. “The Finance-Growth Nexus: Evidence from Bank Branch Deregulation.” Quarterly Journal of Economics, 111 (1996), 639–670.CrossRefGoogle Scholar
Keeley, M. “Deposit Insurance, Risk, and Market Power in Banking.” American Economic Review, 80 (1990), 1183–1200.Google Scholar
Keil, J., and Müller, K.. “Bank Branching Deregulation and the Syndicated Loan Market.” Journal of Financial and Quantitative Analysis, 55 (2020), 1269–1303.CrossRefGoogle Scholar
Kroszner, R. S., and Strahan, P. E.. “What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions.” Quarterly Journal of Economics, Rose, N. L., ed., 114 (1999), 1437–1467.CrossRefGoogle Scholar
Kroszner, R. S., and Strahan, P. E.. “Regulation and Deregulation of the U.S. Banking Industry: Causes, Consequences and Implications for the Future.” In Economic Regulation and Its Reform: What Have We Learned? Chicago, IL: University of Chicago Press (2014), 485–543.Google Scholar
Lummer, S., and McConnell, J.. “Further Evidence on the Bank Lending Process and the Capital Market Response to Bank Loan Agreement.” Journal of Financial Economics, 21 (1989), 99–122.CrossRefGoogle Scholar
Murfin, J. “The Supply-Side Determinants of Loan Contract Strictness.” Journal of Finance, 67 (2012), 1565–1601.CrossRefGoogle Scholar
Ongena, S., and Roscovan, V.. “Bank Loan Announcements and Borrower Stock Returns: Does Bank Origin Matter?” International Review of Finance, 13 (2013), 137–159.CrossRefGoogle Scholar
Petriconi, S. “Bank Competition, Information Choice and Inefficient Lending Booms.” Working Paper, Bocconi University (2021).Google Scholar
Rajan, R. G. “Insiders and Outsiders: The Choice Between Informed and Arm’s-Length Debt.” Journal of Finance, 47 (1992), 1367–1400.Google Scholar
Rice, T., and Strahan, P.. “Does Credit Competition Affect Small-Firm Finance?” Journal of Finance, 65 (2010), 861–889.CrossRefGoogle Scholar
Roodman, D.; Nielsen, O. M.; MacKinnon, J.; and Webb, M.. “Fast and Wild: Bootstrap Inference in Stata Using Boottest.” Stata Journal, 19 (2019), 4–60.CrossRefGoogle Scholar
Ruckes, M. “Bank Competition and Credit Standards.” Review of Financial Studies, 17 (2004), 1073–1102.CrossRefGoogle Scholar
Saidi, F., and Zaldokas, A.. “How Does Firms’ Innovation Disclosure Affect Their Banking Relationships?” Management Science, 67 (2021), 741–768.CrossRefGoogle Scholar
Schenone, C. “Lending Relationships and Information Rents: Do Banks Exploit Their Information Advantages?” Review of Financial Studies, 23 (2010), 1149–1199.CrossRefGoogle Scholar
Schwert, M. “Bank Capital and Lending Relationships.” Journal of Finance, 73 (2018), 787–830.CrossRefGoogle Scholar
Schwert, M. “Does Borrowing from Banks Cost More than Borrowing from the Market?” Journal of Finance, 75 (2020), 905–947.CrossRefGoogle Scholar
Sharpe, S. A. “Asymmetric Information, Bank Lending and Implicit Contracts: A Stylized Model of Customer Relationships.” Journal of Finance, 45 (1990), 1069–1087.Google Scholar
Sufi, A. “Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans.” Journal of Finance, 62 (2007), 629–668.CrossRefGoogle Scholar
Sufi, A. “Bank Lines of Credit in Corporate Finance: An Empirical Analysis.” Review of Financial Studies, 22 (2009), 1057–1088.CrossRefGoogle Scholar
von Thadden, E.-L. “Asymmetric Information, Bank Lending and Implicit Contracts: The Winner’s Curse.” Finance Research Letters, 1 (2004), 11–23.CrossRefGoogle Scholar
Weitzner, G., and Howes, C.. “Bank Information Production Over the Business Cycle.” Working Paper, McGill University and the Federal Reserve Bank of Kansas City (2023).Google Scholar
Supplementary material: File

De Marco and Petriconi supplementary material

De Marco and Petriconi supplementary material
Download De Marco and Petriconi supplementary material(File)
File 160.7 KB