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When deciding whether to introduce market competition into a regulated industry, a regulator faces an important tradeoff. Market-based prices can provide incentives to allocate resources more efficiently and reduce costs, but the presence of market power may lead to increased markups. We use a detailed dataset on electricity transactions to investigate the impact of market-based deregulation in the context of the U.S. electricity sector. We find that the increase in markups dominates despite modest efficiency gains, leading to higher consumer prices. Deregulation does not necessarily reduce prices and improve consumer welfare. Thus, regulated prices may be preferred to market-based prices when firms are capable of exerting market power.

We exploit the staggered removal of a geography-based market friction—the adoption of interstate banking deregulation—to investigate whether banking market development can spill over to the functioning of the equity market, measured as stock market liquidity. Interstate banking deregulation prompted large, sophisticated, out-of-state banks to lend within deregulating states’ borders, potentially altering equity traders’ costs of screening and monitoring borrowers, gathering funds, and/or expectations about economic growth in deregulating states. We find that stock market liquidity increases following banking deregulation, especially for borrowers characterized by greater screening and monitoring costs. Overall, our findings suggest that banking development has positive spillover effects on the functioning of the equity market.

In this article, we investigate the deregulation efforts resulting from the 2015 transposition of the EU’s Transparency Directive into German law and analyze whether a reduction in the minimum content requirements for quarterly reporting increases information asymmetries and decreases firm value. Using a novel dataset of firms that are listed on the Frankfurt Stock Exchange, our results reveal that over the period from 2012 to 2019, lower quarterly reporting levels on average have increased information asymmetry and reduced firm value. We find that this effect is stronger for second-tier stocks and firms with low media coverage. Our results are robust to potential selection effects regarding firms’ choice of quarterly reporting content levels.

This paper investigates the performance sensitivity of geographically diversified and non-diversified banks to local housing prices in the United States. We find that despite enduring the limitation of risk diversification, local banks experience a lower performance sensitivity to housing prices than their diversified counterparts. The difference in sensitivity between the two types of banks is pronounced in bear (but not in bull) housing markets. Further analysis shows that local banks better manage their loan quality, and diversified banks encourage more risk taking. The findings are robust to addressing the endogeneity problems of local housing markets and geographic diversification strategy of banks. Taken together, our findings highlight the local advantage of non-diversified banks and explain why they coexistent with diversified banks even after the consolidation waves following bank deregulation.

This paper investigates the timing of a firm’s first security issue in public capital markets. We explain fluctuations over time in initial public offerings of bonds and stocks. We study Belgium in the period 1839-1935, a setting with poor investor protection, no tax distortions and changing governmental regulations. We find that economic growth leads to stock and bond IPOs and that both types of issues are timed to coincide with favorable market conditions. These effects are the strongest when the securities market has reached a mature level of development. We also find that bond IPOs coincide with more stock IPOs. Finally, our results suggest that a deregulation shock in 1873, which deregulated security markets and made it much easier to set up a firm and list securities, did not directly affect the number of IPOs, but facilitated a booming securities market in later years.

While there is growing evidence of persistent or even permanent output losses from financial crises, the causes remain unclear. One candidate is intangible capital – a rising driver of economic growth that, being non-pledgeable as collateral, is vulnerable to financial frictions. By sheltering intangible investment from financial shocks, counter-cyclical macroeconomic policy could strengthen longer-term growth, particularly so where strong product market competition prevents firms from self-financing their investments through rents. Using a rich cross-country firm-level dataset and exploiting heterogeneity in firm-level exposure to the sharp and unforeseen tightening of credit conditions around September 2008, we find strong support for these theoretical predictions. The quantitative implications are large, highlighting a powerful stabilizing role for macroeconomic policy through the intangible investment channel, and its complementarity with pro-competition product market deregulation.

In this study, we provide one of the first evidence on the effects of bank deregulation on corporate environmental performance. We use a unique dataset that contains rich information on firms’ toxic emissions and exploit bank branching deregulation in China. We find that compared with firms with lower exposure, firms more exposed to this deregulation improve their environmental performance, as measured by lower chemical oxygen demand (COD) emission intensity after deregulation. We further demonstrate that these firms’ production efficiency increases and the ratio of tangible assets to total assets decreases, which suggests that upgrading technology and asset mix are the main channels. To improve the efficiency of the banking system, many developing countries are undergoing or moving toward liberalizing it. By focusing on firm environmental performance, we document an important but unanticipated consequence of bank deregulation, and the result also provide policy implications for the burgeoning reform in green finance.

After the systematic reform in the IPO market from 2005, underwriting spreads in China keep increasing and become even higher than that in the US market during the past decade. Besides, unlike “the seven percent solution” in the US, spreads in China demonstrate a significant cross-sectional variation. Using the sample of IPOs from 2005 to 2015, we examine the determinants and economic meaning of underwriting spreads in China. We find significant firm, issuance, and policy characteristics that explain the variation of underwriting spreads. Next, we extract abnormal components of spreads to further explore their valuation effects. We document that abnormal spreads can reflect promotional efforts performed by underwriters. Specifically, they are positively associated with institutional investor participation and offer price revision in the IPO process. Moreover, we show that promotional efforts lead to reductions in IPO underpricing. Overall, issuing companies benefit from the deregulation of underwriting services in the way that greater promotional efforts lead to less underpricing and more capital raised by IPO firms. However, government interventions and policy uncertainty can result in increased IPO listing costs in China.

This paper studies whether greater competition can mitigate agency problems within banks. We measure the intensity of the agency conflict within a bank by the volume of loans that the bank lends to its insiders (e.g., executives). We first check that these loans are a form of private benefit. By exploiting interstate branching deregulation, we then show that banks react to greater competition by reducing insider lending, especially when the entry of new competitors may more strongly affect bank profitability. Results are robust to using various identification approaches and alternative indicators of agency conflict. We conclude that competitive pressure reduces managerial self-dealing. This paper was accepted by Gustavo Manso, finance.

This paper studies whether foreign investment deregulation promotes firm innovation. A theoretical framework, in which the spillover and competition effects from more foreign firms induced by foreign investment deregulation, is built to guide the empirical evaluation. Exploiting the data on Chinese firm-level patents in a difference-in-differences setting, this paper finds a significantly positive impact of foreign investment deregulation on firm innovation. Moreover, this paper finds a robust heterogeneity that the impact is prominent in the firms with high productivity while being not significant in the firms with low productivity.

We study how short selling affects corporate tax avoidance. By exploiting staggered short-sale deregulation on the Chinese stock market as a source of variation in market pressure and monitoring, our difference-in-differences estimates show that the introduction of a short-selling scheme significantly discourages pilot firms from engaging in tax avoidance. We also find that the negative effect of short selling on tax avoidance is more pronounced for firms that have high advertising costs and high institutional holdings and are located in weak tax law-enforcement regions. We further reveal that short selling has an indirect effect on tax avoidance through the additional external pressure exerted by auditors, media, and financial analysts. Our evidence highlights the monitoring and discipline roles that short sellers play in determining the level of corporate tax avoidance.

Exploiting staggered interstate banking deregulation as exogenous shocks to bank geographic expansion, we examine the causal effect of geographic diversification on systemic risk. Using the gravity-deregulation approach, we find that bank geographic diversification leads to higher systemic risk measured by the change in conditional value at risk ($\Delta$CoVaR) and financial integration (Logistic($R^{2}))$. Furthermore, we document that geographic diversification affects systemic risk via its impact on asset similarity. The impact of geographic diversification on systemic risk is stronger in BHCs located in states comoving less with the U.S. aggregate economy.

Deregulation affects incumbent firms through entry threats (a curse) and entry opportunities (a blessing). To separate these effects, we construct novel network-based measures of U.S. state-level bank deregulation intensity that allow us to isolate the blessing- and curse-related effects of deregulation on incumbents’ outcomes for the first time in the literature. In contrast to existing bank deregulation studies, we find that increased competition leads to higher deposit funding costs and a reduction in banks’ net interest margins and profitability. In response, banks increase their risk-taking, shift their business models, and become more likely to be acquired. Our framework and results bridge multiple literatures and support early bank deregulation theories in which reductions in bank charter values lead to increased risk-taking.

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.

A key issue in the finance-growth nexus literature is endogeneity – economic growth may drive finance as well as finance driving growth. Some research addresses endogeneity using relatively exogenous shocks from U.S. bank geographic deregulation, often documenting favorable economic effects. We connect deregulation shocks for the first time to individual firm growth in a model that differentiates sources of external financing – short-term debt, long-term debt, and equity. Our results suggest that deregulation increases firm growth overall and this growth is fueled by all three external funding sources. However, benefits accrue only to relatively financially unconstrained firms, while relatively constrained firms lose.

We examine the impact of bank competition on the industrial structure using a city-industry level dataset during 2005-2009 in China. We find that bank competition increases the number of firms per capita and decreases average firm size in industries with higher external financial dependence. Bank competition affects industrial structure through increasing the proportion of SMEs. The impact of bank competition is more pronounced for private firms, and joint stock banks are the most efficient players in enhancing industrial structure. We instrument bank competition with average bank competition of other cities in the same province, and also employ the deregulation of bank branching in 2007 as a natural experiment, which confirm the robustness of our findings. Bank competition thus enhances the competition in the product market.

We show that firms with more short-term institutional investors have better long-term performance in dynamic economic environments. Following exogenous increases in competitive pressure due to large cuts of import tariff rates, firms with more short-term investors achieve higher growth rates of sales and employees in comparison to other firms in the industries affected by the tariff cuts. To do so, these firms invest more in fixed assets, R&D, and advertising, and differentiate their products from those of the competitors. Firms with more short-term investors also conduct more diversifying acquisitions and have higher executive turnover in the aftermath of large tariff cuts, suggesting that they put stronger effort in adapting their business to the new competitive environment. These results are not specific to tariff cuts but also robust to increases in competitive pressure due to deregulation shocks. Our findings suggest that firms with more short-horizon investors adapt more promptly to changing economic environments and highlight a potential benefit of short-horizon investors.

Deregulation of major industries over the past 40 years has produced large efficiency gains. However, distributional effects have been more difficult to assess. In the electricity sector, deregulation has vastly increased information available to market participants through the formation of wholesale markets. We test whether upstream suppliers, specifically railroads that transport coal from mines to power plants, use this information to capture economic rents that would otherwise accrue to electricity generators. We find railroads charge higher markups when rents are larger. This effect is larger for deregulated plants, highlighting an important distributional impact of deregulation. (JEL L11, L51, Q48)

This study examines the effect of banking competition on borrowing firms’ conditional accounting conservatism (i.e., asymmetric timely loss recognition). The context of the study is the staggered passage of the Interstate Banking and Branching Efficiency Act (IBBEA), the deregulation that permits banks to establish branches across state lines and increases bank competition. I find that firms report less conservatively after the passage of the IBBEA in their headquarter states. The effect on conditional conservatism is stronger for firms in states with a greater increase in competition among banks, firms that are more likely to borrow from in-state banks, firms with greater financial constraint, and firms subject to less external monitoring. Additional tests confirm that the decline in conditional conservatism is observed only after the adoption of IBBEA and lasts for two years. The findings indicate that banks tend to “lowball” borrowers when competition arises by relaxing their demand for conservative reporting. Overall, this study highlights the unintended impacts of banking competition on borrowing firms’ financial reporting.

We develop a model of sluggish firm entry to explain short-run labor responses to technology shocks. We show that the labor response to technology and its persistence depend on the degree of returns to labor and the rate of firm entry. Existing empirical results support our theory based on short-run labor responses across US industries. We derive closed-form transition paths that show the result occurs because labor adjusts instantaneously whilst firms are sluggish, and closed-form eigenvalues show that stricter entry regulation results in slower convergence to steady state. Finally we show that our theoretical results hold in a quantitative model with capital accumulation and interest rate dynamics.

This paper studies the impact of geographic banking restrictions on monetary policy transmission. Exploiting the staggered deregulation of U.S. banking from the late 1970s to the early 1990s, we find that interstate deregulation signifi cantly increased the responsiveness of bank lending to monetary shocks. This effect occurred primarily for small and illiquid banks, pointing to a strengthening of the bank lending channel. Changes in bank market structure and loan portfolio composition are unlikely to explain the effect of deregulation. This instead reflects a reduced propensity of small banks affiliated with complex holding companies to insulate borrowers from monetary contractions.

Despite ample research demonstrating many consequences of bank geographic deregulation, the bank capital determinants literature has not directly tested the effects of this deregulation. This paper fills this important research gap. We find strong evidence that geographic deregulation significantly increases both bank target capital ratios and speeds of adjustment to these targets. We also identify a significant regime shift towards more active capital management. We test for causality in several ways, including a gravity-deregulation approach with time-varying bank-specific instruments. Findings are also robust to numerous additional checks. Our results suggest that deregulation policies may complement prudential policies, potentially improving financial stability.

Using the staggered and reciprocal passage of interstate bank deregulation as an exogenous variation in the degree of bank integration, we investigate how and why bank integration influences the market for corporate control for nonfinancial firms. We posit that bank integration affects acquisitions either through reducing the information asymmetry between acquirers and targets or through increasing credit supply. Our evidence is more consistent with the former channel. Specifically, we document that (1) cross-state acquisitions are more likely to occur between reciprocally deregulated states, and (2) firms are more likely taken over by out-of-state acquirers after deregulation; this effect is stronger for a target who borrows from an out-of-state bank, whose local bank is acquired by an out-of-state bank, and who is informationally more opaque. Announcement returns for acquirers of out-of-state (particularly private) targets increase after deregulation, consistent with better identification of higher-valued targets by acquirers after deregulation. This paper was accepted by Tomasz Piskorski, finance.

We document that increased competition leads banks to reduce initial rates offered on adjustable-rate mortgages (ARMs) to attract borrowers but increase interest rates after the rate reset and thereby exploit consumer inattention in pricing terms. Consistent with theoretical predictions, we find that banks shroud more with naive borrowers or less financially sophisticated borrowers, who are more subject to behavioral bias. Although competition reduces firm profits and benefits consumers due to price reduction, the effect is small, since firms respond to competition by increasing add-on prices and loans have lower default rates and delayed prepayments since deregulation.

Credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. This study develops an empirical test to determine whether the household demand channel of credit supply expansion is present, and it implements the test using both a natural experiment in the United States in the 1980s based on banking deregulation and an international panel of 56 countries over the last several decades. Consistent with the importance of the household demand channel, credit supply expansion boosts non-tradable sector employment and the price of non-tradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle, leading to more severe recessions.

The frequency with which firms adjust output prices helps explain persistent differences in capital structure across firms. Unconditionally, the most flexible-price firms have a 19% higher long-term leverage ratio than the most sticky-price firms, controlling for known determinants of capital structure. Sticky-price firms increased leverage more than flexible-price firms following the staggered implementation of bank deregulation across states and over time, which we use in a difference-in-differences strategy. Firms’ frequency of price adjustment did not change around the deregulation.

The level of market integration is a critical indicator of resource allocation efficiency. In this paper, we evaluate the dynamic spatial integration in the U.S. natural gas market since deregulation and the relative importance of each location in the overall price discovery process. Using data from seven natural gas spot markets in the U.S, as well as one Canadian spot market located on the border between U.S. and Canada, we find that the U.S. regional natural gas market is on average well-integrated in both the short- and long-runs. The connectedness price index we constructed ranges between 55% and 85% during the sample period (1994–2016). Though the connectedness of the market has generally improved, a marked decline has occurred over the past few years, coincident with the shale gas boom. This decline may be attributed to pipeline capacity constraints in an increasingly oversupplied market and the relatively small number of market participants voluntarily reporting transaction activities to price indexes. We find that the role of each regional market in the overall price discovery process has undergone several shifts during our sample period, depending on the specific market conditions at both the national and regional level. Of the eight locations, Henry Hub and Oneok appear to be the two most active markets, both transmitting and receiving a substantial amount of information throughout most of the sample period.

The study looks at the impact of price of petroleum prices on inflation in the Ghanaian economy in the pre and post deregulation era and associated direction of causality as well as the extent of pass through of high international petroleum products price to the domestic retail market. An ARDL model was applied on time series monthly data of various petroleum fuel prices as well as exchange rate. A pass-through formula use by Baig et al, (2007) was also applied. The results reveal that changes in LPG, Kerosene and premium prices have marginal impact on inflation. The pass through analysis revealed Ghana has not pass through more than 50% of increase price of international or import petroleum product of gasoline, kerosene and LPG to the ordinary consumers in the period of the study and this was lower in the post deregulation than pre deregulation. The study therefore recommends full deregulation to continue since it favours lower pass through of fuel price increase in the world market to ordinary consumers whiles may consider gasoline and premium price increase at the expense of kerosene and liquefied petroleum gas price if inflation is to be shielded from fuel price increase.

Deregulation in the banking industry in the early 1990s stimulated banks to expand the size of their branch networks. This paper studies how complementarities between the branching decisions of rival banks, impacted the effects of deregulation. I use an instrumental variables approach to separately identify banks’ strategic response to rivals’ branching decisions, from common market factors. The results indicate that a bank is 74% more likely to open an additional branch if every one of their market rivals has also expanded their local network by one branch. I then estimate a model of consumer demand for banking services and bank branch network choices, to quantify the importance of accounting for this response when assessing the impact of deregulation. I find that the response to a rival merger or expansion is significant, and that strategic complementarities in the branching decision have contributed to banking markets being over-branched.

The severity of impact of crude oil price shocks on the macro economy of an oil importing country are thought to be moderated by regulating domestic prices of petroleum products. India has adopted a deregulated regime of pricing of bulk purchases of diesel in January 2013 moving away from a controlled and subsidised pricing system. This paper investigates how this change has affected (A) the influence of crude price changes in determining diesel prices in India using an ARDL framework and (B) the severity of impact of international crude oil price changes on the macro economy of India using a SVAR framework. Based on monthly data between 2004 April and 2017 February, we find that in the post deregulation phase (1) diesel prices are influenced by crude oil prices much more than before; (2) the intensity of impact of crude oil price changes on inflation has increased; (3) the response of monetary policy to crude oil price changes have become statistically insignificant. We also find that the impact of crude price changes on output has always been insignificant.

Recent research maintains that the observed variation in productivity within industries reflects resource misallocation and concludes that large GDP gains may be obtained from market-liberalizing polices. Our theoretical analysis examines the impact on productivity dispersion of reallocation frictions in the form of costs of entry, operation, and restructuring, and shows that reforms reducing these frictions may raise dispersion of productivity across firms. The model does not imply a negative relationship between aggregate productivity and productivity dispersion. Our empirical analysis focuses on episodes of liberalizing policy reforms in the U.S. and six East European transition economies. Deregulation of U.S. telecommunications equipment manufacturing is associated with increased, not reduced, productivity dispersion, and every transition economy in our sample shows a sharp rise in dispersion after liberalization. Productivity dispersion under central planning is similar to that in the U.S., and it rises faster in countries adopting faster paces of liberalization. Lagged productivity dispersion predicts higher future productivity growth. The analysis suggests there is no simple relationship between the policy environment and productivity dispersion.

We investigate whether tax avoidance substitutes for external financing. We exploit interstate banking deregulation as a quasi-external shock to examine whether firms engage in less tax avoidance after banking deregulation, because of cheaper and easier access to credit from banks. We find no empirical evidence to support this substitutive relation, even for firms with higher financial constraints or firms with higher external financing dependence.

We examine the extent to which bank CEOs exert influence on the corporate cultures of banking organizations by investigating how the prevalence of materialistic bank CEOs has evolved over time, and how observed risk management policies, the behavior of non-CEO executives and bank tail risk vary with bank CEO materialism. We document that between 1994 and 2004 the proportion of U.S. banks run by materialistic CEOs increased significantly in absolute terms and relative to non-financial firms, coinciding with significant bank deregulation. Using an index reflecting the strength of risk management functions (RMI), we find that RMI is significantly lower for banks with materialistic CEOs, significantly increases after a non-materialistic CEO replaces a materialistic CEO, and decreases after a materialistic CEO succeeds a non-materialistic one. We also provide evidence consistent with non-CEO executives in banks with materialistic CEOs more aggressively exploiting inside trading opportunities around government intervention during the financial crisis. Finally, we find that banks with materialistic CEOs have significantly more downside tail risk relative to banks with non-materialistic CEOs, where the difference between groups increased significantly during the recent crisis.

We explore empirically how capital inflows into the US and financial deregulation within the United States interacted in driving the run-up (and subsequent decline) in US housing prices over the period 1990-2010. To obtain an ex ante measure of financial liberalization, we focus on the history of interstate-banking deregulation during the 1980s, i.e. prior to the large net capital inflows into the US from China and other emerging economies. Our results suggest a long shadow of deregulation: in states that opened their banking markets to out-of-state banks earlier, house prices were more sensitive to capital inflows. We provide evidence that global imbalances were a major positive funding shock for US wide banks: different from local banks, these banks held a geographically diversified portfolio of mortgages which allowed them to tap the global demand for safe assets by issuing private-label safe assets backed by the country-wide US housing market. This, in turn, allowed them to expand mortgage lending and lower interest rates, driving up housing prices.

The purpose is to suggest a model which combines the social equity benefits of income-contingent loans with a market design that is ‘incentive compatible’ through an appropriate price discovery mechanism.

We exploit the OCC's preemption of national banks from state laws against preda- tory lending as a quasi-experiment to study the eect of deregulation and its inter- action with competition on the supply of complex mortgages (prepayment penalties, interest-only, and negative amortization). Following the preemption ruling, national banks signi…cantly increased their origination of loans with prepayment penalties and negative amortization features by comparison with lenders not regulated by OCC and lenders in states without predatory lending laws. Further, we highlight a competi- tion channel: in counties where OCC-regulated lenders had larger market shares prior to the preemption, even non-OCC lenders responded by increasing their use of these riskier terms to the extent permitted by the state predatory-lending laws. Overall, our evidence suggests that the deregulation of credit markets triggered a "race to the bottom"among distressed …nancial institutions, working through competition between lenders.

The frequency with which firms adjust output prices is an important determinant of persistent differences in capital structure across firms. The most flexible-price firms have a 19% higher long-term financial leverage ratio than the most sticky-price firms, controlling for known determinants of capital structure. We rationalize this novel fact in a costly-state-verification model, in which sticky-price firms are more exposed to shocks, and face tighter financial constraints. In the model, a better monitoring ability reduces asymmetric information and narrows the leverage gap between inflexible- and flexible-price firms. Consistently, sticky-price firms increased leverage more than flexible-price firms following the staggered implementation of the Interstate Banking and Branching Efficiency Act across states and over time, which we use in a triple-differences identification strategy. Firms' frequency of price adjustment did not change around the deregulation.

This paper investigates the effects of interest rate reform, regulation vs. deregulation, on capital structure by collecting data from Chinese listed companies between 2003 and 2013 and controlling for the impacts of earnings transparency. We find that the deregulation of interest rates strengthens the positive relationship between earnings transparency and capital structure, implying a favourable effect of interest rate deregulation on risk management. We also find, however, private firms are more sensitive towards interest rate deregulation than state-owned enterprises which have better access to debt finance in China.

This paper explains the process of competitive deregulation that led both the U.S. and the U.K. to embrace universal banking and to abandon the functional separation of financial activities that had long characterized their financial systems. The paper argues that some of the consequences of favoring universal banking over functional separation that were understood in the 1930s were rarely voiced in years preceding deregulation. The principal argument offered in favor of separation was that the commercial banking system, which is supported by a government “safety net,” needs to be protected from the risks inherent in investment banking. By contrast, this paper argues that functional separation played an important role in protecting capital markets from the banking system.Universal banking is associated historically with thinly traded stock markets, and this paper argues that universal banking promotes the formation of a small group of large dealer-banks which dominate the financial system and whose interests are best served by trading on non-public over-the-counter markets. The paper finds that just such a group played a key role in the growing importance of such over-the-counter markets in the U.S. over the past few decades.The paper then argues that the benefits of the greater liquidity that large universal banks can provide to capital markets are offset by the dangers they create when they err. Because mistakes at these large banks are often allowed to grow in size to match the size of the banks, they distort prices on financial markets and sometimes create systemic risk. Two recent examples are given: J.P. Morgan Chase Bank’s “London whale” fiasco and UBS, Merrill Lynch and Citibank’s exposures to subprime mortgages.Finally, the paper explains that the Senate Report on the Glass Steagall Act indicates that the Act was designed in part to limit commercial bank participation in the margin loan market, as this activity makes possible a feedback loop between increases in the money supply and increases in asset prices, which in turn can generate an asset price bubble in capital markets. The recent crisis has led modern researchers to rediscover the relationship between margin lending, feedback loops, and asset price bubbles that was well understood by at least some legislators in the 1930s. The paper argues that the recent crisis demonstrates that modern banking regulation needs to be informed by an understanding of the consequences that may arise when a financial system is dominated by universal banks.

This paper investigates whether greater competition increases or decreases individual bank and banking system risk. Using a new text-based measure of competition, and an instrumental variables analysis that exploits exogenous variation in bank deregulation, we provide robust evidence that greater competition increases both individual bank risk and a bank’s contribution to system-wide risk. Specifically, we find that higher competition is associated with lower underwriting standards, less timely loan loss recognition, and a shift towards non-interest revenue. Further, we find that higher competition is associated with higher stand-alone risk of individual banks, greater sensitivity of a bank’s downside equity risk to system-wide distress, and a greater contribution by individual banks to downside risk of the banking sector.

This paper studies the domestic and international effects of national bank market integration in a two-country, dynamic, stochastic, general equilibrium model with endogenous producer entry. Integration of banking across localities reduces the degree of local monopoly power of financial intermediaries. The economy that implements this form of deregulation experiences increased producer entry, real exchange rate appreciation, and a current account deficit. The foreign economy experiences a long-run increase in GDP and consumption. Less monopoly power in financial intermediation results in less volatile business creation, reduced markup countercyclicality, and weaker substitution effects in labor supply in response to productivity shocks. Bank market integration thus contributes to moderation of firm-level and aggregate output volatility. In turn, trade and financial ties allow also the foreign economy to enjoy lower GDP volatility in most scenarios we consider. These results are consistent with features of U.S. and international fluctuations after the United States began its transition to interstate banking in the late 1970s.

The deregulation process in the EU electricity sector triggered strategic decisions that led to industry restructuring. This paper presents preliminary evidence of the impact of this process on investors, using event studies and estimation techniques such as least squares and GARCH. Our findings suggest three stylized facts: 1) regulatory reform in Europe was certainly accompanied by a takeover wave, as predicted by Mitchell and Mulherin (1996); 2) mergers and acquisitions had a positive impact on the stock price of target firms, and a much lower and sometimes even a negative impact for the bidding firms; 3) the effect of takeover announcements on the returns of competitors of the merging firms depends on the degree of market power. In countries with high market power (like Spain) competitors significantly increase share returns upon takeover announcements, whereas in countries with lower market power (like England and Wales) returns do not change significantly.

We use data from the past 30 years of takeover activity in the U.S. banking industry to test competing neoclassical and misvaluation merger theories. Test results are consistent with evidence in the literature that merger activity is significantly related to both structural industry change and stock price misvaluation. Our primary contribution is to show that changes in misvaluation reflect a rise in industry-wide risk taking and that increases in risk originate from changes in industry structure due to deregulation. A measure of bank risk taking subsumes the power of stock price misvaluation to explain subsequent merger activity.

This dissertation offers insight into the effect of regulation on various aspects of growth and development. Exploiting plausibly exogenous variation generated by deregulatory events, I assess firms’ response to the lifting of size restrictions. In Chapter One, I show that bank branching deregulation increased mortgage lending and home ownership, especially among marginal groups. In Chapter Two, I find that the dismantling of an Indian business regulation constraining investment leads to an increase in firm size, output and productivity.

The deregulation process in the EU electricity sector triggered strategic decisions that led to industry restructuring. This paper presents preliminary evidence of the impact of this process on investors, using event studies and estimation techniques such as least squares and GARCH. Our findings suggest three stylized facts: 1) regulatory reform in Europe was certainly accompanied by a takeover wave, as predicted by Mitchell and Mulherin (1996); 2) mergers and acquisitions had a positive impact on the stock price of target firms, and a much lower and sometimes even a negative impact for the bidding firms; 3) the effect of takeover announcements on the returns of competitors of the merging firms depends on the degree of market power. In countries with high market power (like Spain) competitors significantly increase share returns upon takeover announcements, whereas in countries with lower market power (like England and Wales) returns do not change significantly.

This paper investigates the impact of inter-firm relationships on a firm’s incentive to adjust its capital structure. We predict that firms with tight business relationships with other firms have less incentive to adjust their capital structure because their information will be propagated through the inter-firm relationships and they will be able to seek assistance if they have problems with liquidity. Using a Japanese dataset and constructing three measures of inter-firm relationships, we find that the adjustment speed of firms with tight relationships is slower than that of those without such relationships. Lastly, we explore whether deregulation in the financial markets stimulates the adjustment speed and find that the speed increased after series of deregulations of the Japanese stock market. Overall, these results are consistent with our prediction that inter-firm relationships affect a firm’s incentive to adjust its capital structure.

The late-2000s financial crisis has re-ignited a debate about the impact of regulating consumer mortgage markets. This paper examines how a court-mandated repeal of a home mortgage regulation in Cleveland a effected home foreclosures. To distinguish the effect of deregulation from confounding factors, I use a difference-in-difference research design that compares loan outcomes within and outside the city limits of Cleveland before and after the repeal of the law. Results indicate that deregulation caused a 49 percent increase in early foreclosures while it did not increase total loan originations, implying that bad loans as a share of overall loans increased substantially. Deregulation also increased the number of high-interest loans by 30 percent, increased loans made by subprime lenders by 40 percent. These results are robust to the window of time examined before and after deregulation, as well as to examining only areas on the boundary of the city limits. Moreover, placebo tests reveal there was no divergence in loan quality prior to the Cleveland repeal, and that there was no evidence of a similar divergence in Pittsburgh at the time of repeal in Cleveland.

We show that finance influences innovation by young private firms, an important source of long-term economic growth. We develop a simple theoretical model that predicts that a decrease (increase) in banks' bargaining power vis-a-vis entrepreneurs increases (decreases) both the volume and riskiness of innovation. Using staggered banking deregulation by U.S. states as shocks to the bargaining power of banks, we find that, consistent with our hypotheses, inter-state banking deregulation increased both the level and riskiness of innovation by young private firms while intra-state deregulation decreased them. Further, banking deregulation primarily impacted riskier explorative innovation by young private firms than the less risky exploitative innovation. In contrast, banking deregulation did not affect public firms and mature private firms that are relatively less dependent on bank financing. These results have important policy implications by demonstrating how financial development, through its impact on innovation by young private firms, can have a first order impact on economic growth.

We document substantial variation in the effect of state-level bank branching deregulation in the United States on economic growth. We examine the sources of this variation by testing multiple channels that may link deregulation and economic growth. Using a matching method that utilizes synthetic counterfactual states, we find support for the hypothesis that economic growth was associated with states where deregulation solved a capital immobility or “dammed” credit problem. We do not find support for other channels, which posit that banks became more efficient, financed more innovative businesses, or learned by observing prior deregulations.

This study seeks to understand “how” economic shocks drive industry merger activity. I test whether economic shocks from deregulation and technological change drive industry merger activity by increasing industry competition, controlling for the effect of valuations. I find that these shocks drive merger activity through three channels related to industry competition; deregulation drives merger activity by increasing entry and cash flow volatility; technological change drives merger activity by increasing entry and inter-firm dispersion in the quality of production technology. These findings underscore the role of the competitive mechanism in how managers reallocate assets via mergers and support the view that the industry-level clustering of merger activity is an efficiency-driven restructuring response to increased competition.