Banking regulation, information asymmetries and industry growth: new evidence

Abstract

This article investigates the relationship between banking regulation and disclosure requirements and industry growth of 23 sectors over the period 1990 to 1999. We find evidence that the efficiency of the legal environment significantly affects industry growth. In particular, prudent banking regulation has a depressing effect of industry growth. Excessive disclosure requirements hinder the results of leveraged industrial sectors. Furthermore, we confirm positive effects of investor protection on growth.

Notes

¹ Jayaratne and Strahan (1996) evaluate the effect of US bank regulation on growth. In particular, they analyse the effects that US bank intrastate branch deregulation.

² The underlying assumption is that capital markets are not perfectly integrated and that firms finance themselves largely in their own country. A similar assumption has been made in related papers and there is evidence on the existence of frictions in international capital markets (Lombardo, 2000). Particularly, there is evidence on strong home bias portfolio (French and Poterba, 1991) and cross country differences in expected returns (Bekaert and Harvey, 1995, 2000; Lombardo, 2000).

³ Some recent empirical papers use time series techniques to overcome these problems (Bhattacharya and Sivasubramanian, 2003; Al-Awad and Harb, 2005; Shan, 2005 among others). However, due to the nature of our data, and the relationships we want to estimate, we perform a cross-country cross-industry regression.

⁴ Bank for the Accounts of companies Harmonized. European Committee of Central Balance Sheet Offices.

⁵ La Porta et al . (1998) and Rajan and Zingales (1998) among other studies use an index of disclosure standards for different countries. Such an index is developed by the Centre for International Financial Analysis and Research (CIFAR) and it is based on the inclusion or omission of different items in firm annual reports. At least three firms are considered in each country. Therefore, this index could represent the practice of some firms and not the legal requirements to disclose information. Hence, we decide to evaluate legal provisions on disclosure entailing all companies.

⁶ We use some technical texts: On corporate law: Hawkins and Morton (1990), Raybould and Firth Ed. (1991) and Hawk (1994). On accounting: Alexander and Archer (1992) and Blake and Amat (1993). On banking and financial markets: Interbank Research Organization (1978), Moreiro (1992), Parejo et al . (1993), Campbell and Moore (1993), Forestieri and Mottura (1998), Katayama and Makov (1998) and banking regulations from Spain, Germany, Austria, Portugal and France.

⁷ European national banking laws had to adapt Second banking European Directive by 1993. Similarly, disclosure requirements had to adapt the Single Market normative by 1993.

⁸ For instance, branching restrictions only disappear in 1997, despite almost all American banking economists had agreed for over two decades that such a measure would improve banking sector efficiency. A similar debate has taken place during the nineties concerning the repealing of Glass–Steagall Act, that was finally repealed in 2000.

⁹ The idea of using categories to study banking regulation has also been used in a study on European banking regulation developed by Interbank Research Organization (1978) and Allen and Gale (1995). Parejo et al . (1993) and Barth et al . (2001) have used similar categories to analyse banking regulation as well.

¹⁰ Chartering requirements have been traditionally used to restrict entry and competition (Mishkin, 2000).

¹¹ In this case we add one unit when the protective tactics are not permitted.

¹² In the case of United States, we sum one unit because the use of pills are not absolute: managers can use defensive tactics only to the extent that is reasonable in relation to the threat posed and always protecting shareholder rights (Unocal Test, 1985). The Delaware courts also indicated that they protect against managerial moves to impede voting by shareholders to remove them. On the contrary, some European countries allow shareholder voting rights restrictions (France) or the ‘creative use of share capital’ (The Netherlands).