The Efficiency of Capital Allocation: Do Bank Regulations Matter?

Journal article: We document that the deregulation of bank branching restrictions in the United States triggered a reallocation across sectors, with end effects on state-level volatility. The change cannot be explained simply by shifts in sector-level returns and volatility. A reallocation effect is at play, which we study in the context of mean-variance portfolio theory applied to sectoral returns. We find the reallocation is particularly strong in sectors characterized by young, small and external finance dependent firms, and for states that have a larger share of such sectors. The findings suggest that improving bank access to branching affects the sectoral specialization of output, in a manner that depends on the variance-covariance properties of sectoral returns, rather than on their average only.

Author(s)

Viral V. Acharya, Jean Imbs, Jason Sturgess

Journal
  • Review of Finance
Date of publication
  • 2011
Keywords JEL
E44 F02 F36 G11 G21 G28 O16
Keywords
  • Financial development
  • Growth
  • Volatility
  • Diversification
  • Deregulation
  • Liberalization
  • Mean-variance efficiency
Pages
  • 135-172
Version
  • 1
Volume
  • 15