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The Firm-Level Real Effects of Bank-Scope Deregulation: Evidence from the Rise of Universal Banking

Are banks of wide scope better intermediaries? Using the variation in bank scope generated by the stepwise repeal of the Glass-Steagall Act in the U.S. and the subsequent rise of universal banking, we provide evidence that economies of scope in concurrent lending and underwriting improve the access to finance for risky ventures of publicly traded companies. Exploiting a bank-level deregulatory shock, as well as detailed data on bank-firm interactions, we identify increases in sales-growth, stock-return, and option-implied volatilities for universal-bank-financed firms. These firms also exhibit lasting increases in total factor productivity of 3 to 4%, echoed by similar findings for increases of 6 to 7% in capital expenditure and 5 to 9% in market capitalization. Our findings suggest that the facilitation of cross-selling of loans and non-loan products through bank-scope deregulation may have led to an increase in the supply of credit for firms making risky, productivity-increasing investments.