Geographic deregulation and banks’ cost of equity capital

• Published in: Journal of international money and finance Vol. 120; p. 102498
• Main Authors: Berger, Allen N., El Ghoul, Sadok, Guedhami, Omrane, Roman, Raluca A.
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.02.2022
• Subjects: Acquisitions; Bank deregulation; Cost of equity capital; M&As; Market discipline; Risk; Acquisitions; Market discipline; Bank deregulation; G21; M&As; Risk; G34; G28; Cost of equity capital
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2021.102498

•We examine the effects of geographic deregulation on banks’ cost of equity (COE) using .•Deregulation increases banks’ COE, primarily driven by active acquirers.•We identify higher risk-taking as an important channel for these findings.•The results support our new acquisitions–fragility view.•Robust to instrumental variables, checking for secular trends, other explanations. 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.