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Foreign bank entry deregulation and stock market stability: Evidence from staggered regulatory changes

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  • Lin, Tse-Chun
  • Liu, Jinyu
  • Ni, Xiaoran

Abstract

Exploring staggered quasi-exogenous regulatory changes in China, we find that the foreign bank entry deregulation significantly reduces the likelihood of stock price crashes of domestic listed firms. The effect is more pronounced among firms with worse ex-ante agency problems and performances, consistent with a monitoring spillover effect from foreign banks. Supportive evidence suggests that foreign bank entry reduces overall financing costs and extends loan maturity. Domestic firms’ corporate governance, fundamentals, and stock price efficiency improve as well. Overall, our findings highlight an unexplored role of banking sector deregulation in curtailing price crash risks and improving the stability of stock markets.

Suggested Citation

  • Lin, Tse-Chun & Liu, Jinyu & Ni, Xiaoran, 2022. "Foreign bank entry deregulation and stock market stability: Evidence from staggered regulatory changes," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 185-207.
    • Handle: RePEc:eee:empfin:v:69:y:2022:i:c:p:185-207
    DOI: 10.1016/j.jempfin.2022.09.005
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    More about this item

    Keywords

    Foreign bank entry deregulation; Stock price crash; Regulatory change; Corporate governance; Monitoring spillover effect; Stock market stability;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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