The real effect and consequence of regulation reform in corporate finance and banking

This thesis includes three thorough studies which examine the real effect and consequence of regulation reform in banking and corporate finance over the last decades. It starts with a cross-country study which investigates how regulation and supervision over banks affect their systemic risk. Motivated by a new database of banking regulation and supervision from the Bank Regulation and Supervision Survey of the World Bank, we conduct an empirical analysis for banks from 65 countries from the period 2001 to 2013. We find that bank activity restriction, initial capital stringency and prompt corrective action are all positively related to systemic risk which is measured by Marginal Expected Shortfall. Next, to address the potential endogenous issue which can undermine the baseline results, we employ the staggered timing of Basel II regulation across countries as an exogenous event, and also instrumental variable analysis. Our results are held for both tests. On top of that, we conduct a series of robustness tests, including using weighted-least-square regression analysis to account for the differences in the number of banks across countries, subsamples, and using an alternative measure of systemic risk by SRISK. Last, we provide further evidence to show that positive relationship between regulation and supervision and systemic risk is through banks’ capability of raising capital: the positive impact of bank regulation and supervision on systemic risk tents to be amplified if banks are bigger, but the effect can be alleviated of banks are better capitalized or more diversified. Overall, this study highlights the importance of capability of banks’ capital raising, especially during difficult times. Our findings do not argue that bank regulation and supervision are detrimental to systemic risk, but instead call for the proper design and implementation of bank regulation. In the second one, we focus on how firms’ CSR performance respond to the Interstate Banking and Branching Efficiency Act (IBBEA) passed in the U.S 1994. The interstate deregulation increases the bank competition at the state level significantly, expanding the availability and reducing the cost of credit. We find that firms which experience the deregulation show a significant and persistent decrease in CSR, suggesting firms show “doing good” for the access to finance in an uncompetitive credit market. To address the potential concern about reverse causality, we examine the dynamic effect of interstate banking deregulation on firms’ CSR performance. We find no evidence on the pre-trend in the change of firm CSR performance prior to deregulation but a significant decrease in the year of bank deregulation. We further conduct a placebo test by employing falsified deregulation years and randomly assigned to different states. The results show that falsified deregulation is unlikely to affect firms CSR performance. Next, we attempt to rule out an alternative explanation of bank relationship lending for the main findings. In the end, we provide direct evidence on the channel of financial constraints through which firms’ CSR performance is reduced after the bank deregulation. The results found in this study suggest that banks may engage in CSR as a strategical investment to delight external stakeholders. While when the needs from stakeholders decrease, firms’ CSR engagement can reduce consequently. In the third study, we extend the research scope to examining the effect of general corporate income tax on firm investment efficiency. There are well-established literature on how corporate tax can affect firms investment decisions, mainly on the absolute investment level, while whether the tax-induced investment is efficient for firms is underexplored. In this study, we stand from shareholders’ perspective and examine the impact of corporate income tax on the efficiency of firms’ investment decision by exploiting staggered changes in state-level corporate income tax rates. We find that the tax rate changes can asymmetrically affect firms’ investment efficiency: the tax increase aggravates overinvestment while tax cut mitigates underinvestment. Additional evidence suggests the tax changes are more significant for firms which engage aggressively in tax planning or less capable in tax avoidance activities. We further confirm the asymmetrical effects of tax changes through financing channel and agency cost channel respectively. Our results are held to endogeneity tests and a series of robustness tests. Taken together, our study add new evidence to how general tax policies can distort investment decision