Bank deregulation and corporate risk

Abstract

Although research shows that competitive banks spur corporate growth, less is known about the impact of bank competition on corporate risk. Using a sample of more than 70,000 firm-year observations covering the period from 1975 through 1994, we find that deregulation that intensified competition among banks materially reduced corporate risk, especially among firms that rely heavily on bank finance. We find that competition-enhancing bank deregulation reduced corporate volatility by easing credit constraints when firms experience adverse shocks and reducing the procyclicality of borrowing.