The effect of interstate banking deregulation on the valuation of bank earnings

This dissertation examines the effect of the inter-state banking deregulation on the relation between unexpected returns and unexpected earnings for a sample of banking firms. Prior studies have devoted much attention to the effect of cross-sectional differences in firms' operational environment and their own economic characteristics on the valuation of firm earnings. While these studies provided insights into the nature of the information conveyed by accounting earnings, observed difference in the valuation of firm earnings may be driven by the cross-sectional difference in the quality of reported earnings, rather than firms' fundamental economic characteristics.;This dissertation investigates the longitudinal change in the valuation of earnings in a single industry. Therefore, the confounding effect of the cross-sectional difference in the quality of reported earnings is mitigated. The study finds that a given unit of earnings news for a banking firm has a smaller effect on its unexpected stock price change after the inter-state banking deregulation. The result can be attributed to increased systematic risk and/or reduced entry barriers after the inter-state banking deregulation. This study sheds some lights into the dynamics in the evaluation of firm earnings. The framework and methods presented in the study hold promise for examining the changes in the valuation of earnings in other industry deregulation contexts.