Exploiting differential interstate-branching deregulation across contiguous counties of adjacent states, we investigate the effect of entry threat on incumbent banks’ loan-loss provisions. Incumbents exposed to entry threat have offsetting incentives; lower provisions make their loan-underwriting quality appear better, deterring entry, but make local economic conditions appear better, encouraging entry. We find that the incentive to increase apparent loan-underwriting quality dominates on average. We further find that this incentive is stronger in counties with a higher proportion of heterogeneous loans, while the other incentive dominates in counties with both low heterogeneous loans and highly volatile economic conditions.
We thank Tara Rice for providing her state-level interstate branching restriction data and Allan Collard-Wexler for providing his contiguous-county data. We thank Dick Sylla and Larry White for insights regarding the historical development of bank regulation. We thank Jeff Callen, Daniel Cohen, Giovanni Dell’Ariccia (the referee), Richard Frankel, Wayne Guay, Scott Liao, Alvis Lo, Paul Malatesta (the editor), and seminar participants at New York University, Leeds University Business School, the 2013 NYU summer camp, the 2013 London Business School symposium, the 2013 Yale fall conference, the 2013 American Accounting Association annual meeting, and Georgetown University for useful comments on prior versions of the paper.
Email your librarian or administrator to recommend adding this journal to your organisation's collection.
Full text views reflects the number of PDF downloads, PDFs sent to Google Drive, Dropbox and Kindle and HTML full text views.
* Views captured on Cambridge Core between 4th April 2018 - 24th April 2018. This data will be updated every 24 hours.