Bank Entry Barriers and Firms' Risk-Taking

We study how nonfinancial firms' operating risks change after bank competition increases. By exploiting the 1990s staggered regulatory reforms across U.S. states that allowed interstate banking and branching, we show that out-of-state bank entry was associated with lower borrower risk-taking on average. Large, profitable, safe, and geographically diversified firms signed up as new clients of large entrant banks, which offered larger and cheaper loans that reflected their higher efficiency and risk reduction through geographical diversification. We argue that these large banks could substitute for local relationship lending with more data collection from branches in multiple states. Firms that began borrowing from entrant banks increased capital expenditures and project-specific financing and kept R&D expenses stable but reduced R&D risk. Firms that continued borrowing from incumbent banks paid higher interest rates and increased their risk, suggesting that their credit access fell. States that opened up more had bigger changes in these outcomes.