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Geographic deregulation and banks’ cost of equity capital

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  • Berger, Allen N.
  • El Ghoul, Sadok
  • Guedhami, Omrane
  • Roman, Raluca A.

Abstract

We examine the effects of geographic deregulation on banks’ cost of equity (COE) using changes in interstate bank branching laws over the post–Riegle-Neal period (1994:Q4–2016:Q4). We find strong evidence that deregulation increases banks’ COE. This is driven primarily by active acquirers, rather than those subject to increased competition from these acquirers. We identify higher risk-taking as an important channel for these findings. The results support our new acquisitions–fragility view, rather than the traditional competition–fragility view. Results are robust to instrumental variables, accounting for secular trends, and alternative explanations.

Suggested Citation

  • Berger, Allen N. & El Ghoul, Sadok & Guedhami, Omrane & Roman, Raluca A., 2022. "Geographic deregulation and banks’ cost of equity capital," Journal of International Money and Finance, Elsevier, vol. 120(C).
  • Handle: RePEc:eee:jimfin:v:120:y:2022:i:c:s0261560621001492
    DOI: 10.1016/j.jimonfin.2021.102498
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    More about this item

    Keywords

    Bank deregulation; Cost of equity capital; Risk; Acquisitions; M&As; Market discipline;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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