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Bank Competition and Information Production

Author

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  • Filippo De Marco
  • Silvio Petriconi

Abstract

We show that competition adversely affects the "specialness" of bank lending. In particular, we observe that the positive abnormal return on the borrowing firm's stock after the announcement of a bank loan is reduced in US states that deregulate interstate branching.The negative effect of competition on the value of bank loans is present only for ex-ante opaque firms (i.e., firms with few tangible assets and bank-dependent borrowers) and for banks that presumably rely more on "soft" information (i.e., small banks).Moreover, we find that the probability of a covenant violation in a syndicated deal and charge-off rates on small business loans are higher in deregulated states. Our results suggest that competition decreases loan quality because it reduces banks' incentives to invest in information.

Suggested Citation

  • Filippo De Marco & Silvio Petriconi, 2019. "Bank Competition and Information Production," BAFFI CAREFIN Working Papers 19130, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    • Handle: RePEc:baf:cbafwp:cbafwp19130
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    More about this item

    Keywords

    asymmetric information; competition; bank deregulation; loan announcement returns;
    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

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