Firm volatility and banks: evidence from U.S. banking deregulation
Abstract: This paper exploits the staggered timing of state-level banking deregulation in the United States during the 1980s to study the causal effect of banking integration on the volatility of non-financial corporations. We find that firm-level employment, production, sales, and cash flows are less volatile after interstate banking deregulation, particularly for firms that have limited access to external finance. This finding suggests that bank-dependent firms exploit wider access to finance after deregulation to smooth out idiosyncratic shocks. In fact, short-term credit becomes less pro-cyclical after out-of-state bank entry is permitted. Finally, lower volatility in real-side variables after deregulation translates into lower idiosyncratic risk in stock returns.
File(s): File format is text/html http://www.federalreserve.gov/pubs/feds/2009/200946/200946abs.html
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/2009/200946/200946pap.pdf
Part of Series: Finance and Economics Discussion Series
Publication Date: 2009