Banks And The Bonding Hypothesis

Abstract

Previous research has indicated the effect that regulatory jurisdictions have on firm corporate governance. Firms that need to finance investments can reduce their cost of capital by adopting stronger regulation by cross-listing their shares in overseas markets. By taking this idea as a point of departure, this study aims to see whether banks can improve governance by expanding banking operations into the United States. This is measured by examining banks' loan loss provisions as a mechanism of earnings management through an event study. The event study is structured as a set of cross-sectional ordinary least squares over time trying to capture the effect of US financial regulation on tendencies to manage earnings via loan loss provisions. The results are mixed, stemming from weak data and limited observations; however, other considerations are taken into account to potentially further the study in the future.