Bank Expansion, Fintech Disruption, and Capital Market Choices: Understanding Financial Institutions and Investment Decisions

Abstract

In the first study, we examine the impact of geographic expansion of intrastate Bank Holding Companies (BHCs) on their funding costs following changes in intrastate branching restrictions in the U.S. Unlike intrastate BHCs, many of interstate BHCs expand not only across state lines but also within their home states, making it challenging to determine whether the effects of geographic expansion on main variables of interest are solely due to entering new states or further expanding within their home states. We consider this important factor in our empirical analysis and find that intrastate geographic expansion, on average, lowers funding costs for intrastate BHCs. These funding cost reductions for the intrastate BHCs are stronger in retail funding than wholesale funding. In addition, results from moderating effects0F suggest that 1) these effects on funding cost reductions are lessened when BHCs expand into counties that have highly correlated natural conditions with their home counties and that experience more natural disasters; 2) these reductions in funding costs from intrastate geographic diversification are more pronounced for BHCs that experience less agency friction. In the second essay, we analyze lending behaviors of institutional and retail investors during COVID-19. By comparing loan records funded by both types of investors, we find that retail investors act as stable fund providers throughout the pandemic. In contrast, institutional investors quickly withdraw their investment. Consequently, this contraction in credit supply significantly affected financially constrained borrowers after the outbreak. Furthermore, although institutional investors demonstrate an advantage in selecting higher-quality loans before the pandemic, this advantage diminishes as delinquency rates decrease for retail investor-funded loans and increase for institutional-funded loans, ultimately resulting in no significant difference. Lastly, institutional investors, especially active ones, display strong risk-averse behavior during the uncertainty phase. We attribute institutional investors' behavior to their higher sensitivity to systemic risks and monetary policy changes during the pandemic. In contrast, retail investors are drawn to the unique features of the crowdfunding model, finding marketplace lending platforms to be a relatively low-risk investment option amid limited alternatives. The third essay investigates Special Purpose Acquisition Companies (SPACs), also known as "blank check" companies. We conduct a cross-sectional analysis of stock returns for private companies going public via SPAC IPOs, finding that warrants, time-to-merger, and deal value are negatively associated with de-SPAC returns. In addition, we examine factors influencing a private firm’s decision to choose a SPAC IPO over a traditional IPO, with Lasso variable selection revealing new significant variables. Our comparison of return performance between SPAC IPO mergers and traditional IPOs shows that SPAC IPOs underperform in terms of three-month returns, though there are no significant differences in initial-day, six-month, or one-year returns. In terms of risk-adjusted returns, the two types of IPOs perform similarly, with mixed results on relative riskiness, but minimal economic differences.