Regulatory Spillovers in Local Mortgage Markets

Ivan Lim, Duc Duy Nguyen and Linh Nguyen

The Review of Corporate Finance Studies, 2024, vol. 13, issue 3, 775-817

Abstract: We document novel evidence on the spillover effect of a corporate control regulation on local mortgage markets. We find that banks directly targeted by the Sarbanes-Oxley Act (SOX) to rectify their internal control weaknesses reduce mortgage originations following the regulation’s enactment. This causes mortgage credit to be reallocated toward other banks in the same local markets: while competing public banks expand lending to safer borrowers, private banks increase lending toward risky applicants. Consequently, loans originated by private banks in spillover counties report higher default rates. (JEL E51, G21, G38)

Date: 2024
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