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Firm volatility and banks: evidence from U.S. banking deregulation

Ricardo Correa and Gustavo Suarez

No 2009-46, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: Banks and banking; Interstate banking (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ban, nep-bec and nep-fmk
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