This paper examines the effects of accounting-based thresholds in regulation on growth decisions in the banking industry. To investigate this relation we study changes in growth around the $10 billion asset threshold specified in the Dodd-Frank Act. We first document that, in the years after the new threshold-based regulations are announced, banks slow their asset growth as they approach the threshold and then accelerate their asset growth as they cross the threshold. Next, we document the primary mechanism banks use to achieve each of these changes in growth: reduced deposit growth rates to slow growth and increased acquisition activity to accelerate growth. Finally, we document that, while banks attempt to remain below the threshold, they reduce the growth of their investment portfolio and report a lower return on assets. Also, when banks accelerate growth through acquisition activity, those acquisitions involve larger and riskier target banks. These findings suggest that regulations with accounting-based thresholds can affect growth decisions and profitability in the banking industry.
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We thank Peter Easton (editor), an anonymous reviewer, Brad Badertscher, Anne Beatty, Allen Berger (discussant), Jennifer Blouin, Yiwei Dou, Vivian Fang, Luzi Hail, Mirko Heinle, Leslie Hodder, Carol Marquardt (discussant), Kevin Riley (discussant), Cathy Schrand, Chris Williams, Haiwen Zhang, Frank Zhou, participants of the Fisher College of Business Centennial Accounting Conference, the FDIC’s Center for Financial Research seminar series, 2017 Community Banking in the 21st Century Research and Policy Conference, the 2017 Conference on Financial Economics and Accounting and workshop participants at The Ohio State University, the University of Pennsylvania, the University of Minnesota, the University of Kentucky, the University of Washington, Massachusetts Institute of Technology, and the University of Chicago for helpful comments and suggestions. We gratefully acknowledge financial support from the Fisher College of Business, Jones Graduate School of Business, the Carlson School of Management, the Wharton School, and the Deloitte Foundation Doctoral Fellowship. Allison Nicoletti is grateful for financial support from the Alfred H. Williams Faculty Scholar Award. This paper was previously circulated under the titles “Regulatory asset thresholds and growth decisions in the banking industry” and “Regulatory asset thresholds and acquisition activity in the banking industry.”
© 2021, The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature.
- Accounting-based thresholds