Foreign bank entry deregulation and stock market stability: Evidence from staggered regulatory changes

Exploring staggered quasi-exogenous regulatory changes in China, we find that the foreign bank entry deregulation significantly reduces the likelihood of stock price crashes of domestic listed firms. The effect is more pronounced among firms with worse ex-ante agency problems and performances, consistent with a monitoring spillover effect from foreign banks. Supportive evidence suggests that foreign bank entry reduces overall financing costs and extends loan ma-turity. Domestic firms' corporate governance, fundamentals, and stock price efficiency improve as well. Overall, our findings highlight an unexplored role of banking sector deregulation in curtailing price crash risks and improving the stability of stock markets.