Geographic deregulation and banks' cost of equity capital. (February 2022)

• Record Type: Journal Article
• Authors: Berger, Allen N.; El Ghoul, Sadok; Guedhami, Omrane; Roman, Raluca A.
• Is Part Of: Journal of international money and finance. Volume 120(2022)
• Publication Date: 2022-02
• Subjects: Bank deregulation -- Cost of equity capital -- Risk -- Acquisitions -- M&As -- Market discipline; G21 -- G28 -- G34; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2021.102498
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: We examine the effects of geographic deregulation on banks' cost of equity (COE) using . Deregulation increases banks' COE, primarily driven by active acquirers. We identify higher risk-taking as an important channel for these findings. The results support our new acquisitions–fragility view . Robust to instrumental variables, checking for secular trends, other explanations. Abstract: We examine the effects of geographic deregulation on banks' cost of equity (COE) using changes in interstate bank branching laws over the post–Riegle-Neal period (1994:Q4–2016:Q4). We find strong evidence that deregulation increases banks' COE. This is driven primarily by active acquirers, rather than those subject to increased competition from these acquirers. We identify higher risk-taking as an important channel for these findings. The results support our new acquisitions–fragility view, rather than the traditional competition–fragility view . Results are robust to instrumental variables, accounting for secular trends, and alternative explanations.