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Banking competition, financial dependence and productivity growth in Europe

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  • Leroy, Aurélien

Abstract

This study empirically analyses the links between banking competition and manufacturing productivity growth for a sample of 10 European countries during the period 1999–2009. To test this relationship, which from a theoretical point of view is unclear, we use a difference-in-difference methodology similar to the one proposed by Rajan and Zingales (1998). We find that the total factor productivity of the most financially dependent industries grows more slowly in economies where banking competition is fiercer. We explain this result with the fact that bank market power, i.e., low competition, would promote relationship banking, as theoretically argued, for example, by Petersen and Rajan (1995). Relationship banking would allow banks to reduce information asymmetries, which would benefit small and/or young firms, improving the allocation of funds. Banks may select more of the best firms, which would increase total factor productivity of the industries that are more dependent on external finance.

Suggested Citation

  • Leroy, Aurélien, 2019. "Banking competition, financial dependence and productivity growth in Europe," International Economics, Elsevier, vol. 159(C), pages 1-17.
    • Handle: RePEc:eee:inteco:v:159:y:2019:i:c:p:1-17
    DOI: 10.1016/j.inteco.2016.01.001
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    Cited by:

    1. Corrado, Carol & Haskel, Jonathan & Jona-Lasinio, Cecilia, 2019. "Productivity growth, capital reallocation and the financial crisis: Evidence from Europe and the US," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    2. Shabir, Mohsin & Jiang, Ping & Shahab, Yasir & Wang, Peng, 2023. "Geopolitical, economic uncertainty and bank risk: Do CEO power and board strength matter?," International Review of Financial Analysis, Elsevier, vol. 87(C).
    3. Cristian Barra & Nazzareno Ruggiero, 2021. "The role of nonlinearity on the financial development–economic performance nexus: an econometric application to Italian banks," Empirical Economics, Springer, vol. 60(5), pages 2293-2322, May.
    4. Afsana Yesmin, 2018. "Do competition and development indicators heterogeneously affect risk and capital? Evidence from Asian banks," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 1-18, September.
    5. Changjun Zheng & Anupam Das Gupta & Syed Moudud-Ul-Huq, 2017. "Do market competition and development indicators matter for banks’ risk, capital, and efficiency relationship?," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-27, June.
    6. Alin Marius ANDRIEȘ & Sabina CAZAN & Nicu SPRINCEAN, 2022. "The Nexus between Bank M&As and Financial Development," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 5-28, April.
    7. Jareño, Francisco & González, María de la O & Escolástico, Alba M., 2020. "Extension of the Fama and French model: A study of the largest European financial institutions," International Economics, Elsevier, vol. 164(C), pages 115-139.

    More about this item

    Keywords

    Bank competition; Total factor productivity; Economic growth; Industrial growth; Innovation;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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