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

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Author Info

  • Ricardo Correa
  • Gustavo A. Suarez

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.

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File URL: http://www.federalreserve.gov/pubs/feds/2009/200946/200946abs.html
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File URL: http://www.federalreserve.gov/pubs/feds/2009/200946/200946pap.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2009-46.

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Date of creation: 2009
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Handle: RePEc:fip:fedgfe:2009-46

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Related research

Keywords: Banks and banking ; Interstate banking;

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Cited by:
  1. Sebnem Kalemli-Ozcan & Bent E. Sørensen & Vadym Volosovych, 2010. "Deep Financial Integration and Volatility," Koç University-TUSIAD Economic Research Forum Working Papers 1006, Koc University-TUSIAD Economic Research Forum, revised Apr 2010.
  2. Fabio Ghironi & Viktors Stebunovs, 2010. "The Domestic and International Effects of Interstate U.S. Banking," Boston College Working Papers in Economics 765, Boston College Department of Economics.
  3. Cappiello, Lorenzo & Kadareja, Arjan & Kok, Christoffer & Protopapa, Marco, 2010. "Do bank loans and credit standards have an effect on output? A panel approach for the euro area," Working Paper Series 1150, European Central Bank.
  4. Ricardo Correa, 2008. "Bank integration and financial constraints: evidence from U.S. firms," International Finance Discussion Papers 925, Board of Governors of the Federal Reserve System (U.S.).

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