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Bank Competition and Information Production
Published online by Cambridge University Press: 23 February 2024
Abstract
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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.
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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.
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