Firm volatility and banks: evidence from U.S. banking deregulation
Ricardo Correa and
No 2009-46, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)
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)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2009-46
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