IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v32y2008i9p1820-1835.html
   My bibliography  Save this article

Competition versus efficiency: What drives franchise values in European banking?

Author

Listed:
  • De Jonghe, Olivier
  • Vennet, Rudi Vander

Abstract

This paper investigates how stock market investors perceive the impact of market structure and efficiency on the long-run performance potential of European banks. To that end, a modified Tobin’s Q ratio is introduced as a measure of bank franchise value. This measure is applied to discriminate between the Market Structure and Efficient-Structure hypotheses in a coherent forward-looking framework, in which differences in banks’ horizontal and vertical differentiation strategies are controlled for. The results show that banks with better management or production technologies possess a long-run competitive advantage. In addition, bank market concentration does not affect all banks equally. Only the banks with a large market share in a concentrated market are able to generate non-competitive rents. The paper further documents that the forward-looking, long-run perspective and the noise adjustment of the performance measure overcome most of the drawbacks associated with testing these hypotheses in a multi-country set-up. Finally, notwithstanding the international expansion of bank activities, the harmonization of regulation and the macroeconomic convergence in the European Union (EU15), we still find that country-specific macroeconomic variables have a significant impact on bank performance. The findings indicate that there is a trade-off between competition and stability that should be taken into account when assessing mergers or acquisitions.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • De Jonghe, Olivier & Vennet, Rudi Vander, 2008. "Competition versus efficiency: What drives franchise values in European banking?," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1820-1835, September.
  • Handle: RePEc:eee:jbfina:v:32:y:2008:i:9:p:1820-1835
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(07)00396-2
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Berlin, Mitchell & Mester, Loretta J, 1999. "Deposits and Relationship Lending," The Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 579-607.
    2. Stephen Bond, 2000. "Noisy Share Prices and the Q Model of Investment," Econometric Society World Congress 2000 Contributed Papers 1320, Econometric Society.
    3. Berger, Allen N, 1995. "The Profit-Structure Relationship in Banking--Tests of Market-Power and Efficient-Structure Hypotheses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 404-431, May.
    4. Berger, Allen N. & Bonaccorsi di Patti, Emilia, 2006. "Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1065-1102, April.
    5. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 291-299, May.
    6. Allen N. Berger & Timothy H. Hannan, 1998. "The Efficiency Cost Of Market Power In The Banking Industry: A Test Of The "Quiet Life" And Related Hypotheses," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 454-465, August.
    7. David Card, 1995. "The Wage Curve: A Review," Working Papers 722, Princeton University, Department of Economics, Industrial Relations Section..
    8. Corvoisier, Sandrine & Gropp, Reint, 2002. "Bank concentration and retail interest rates," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2155-2189, November.
    9. Asli Demirgüč-Kunt & Luc Laeven & Ross Levine, 2004. "Regulations, market structure, institutions, and the cost of financial intermediation," Proceedings, Federal Reserve Bank of Cleveland, pages 593-626.
    10. Moshe Kim & Eirik Gaard Kristiansen & Bent Vale, 2012. "Life‐Cycle Patterns of Interest‐Rate Mark‐Ups in Small‐Firm Finance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 629-657, June.
    11. Smirlock, Michael, 1985. "Evidence on the (Non) Relationship between Concentration and Profitability in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 69-83, February.
    12. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    13. Allen N. Berger & Astrid A. Dick & Lawrence G. Goldberg & Lawrence J. White, 2007. "Competition from Large, Multimarket Firms and the Performance of Small, Single-Market Firms: Evidence from the Banking Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 331-368, March.
    14. Berger, Allen N. & Mester, Loretta J., 1997. "Inside the black box: What explains differences in the efficiencies of financial institutions?," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 895-947, July.
    15. Kim, Moshe & Kristiansen, Eirik Gaard & Vale, Bent, 2005. "Endogenous product differentiation in credit markets: What do borrowers pay for?," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 681-699, March.
    16. Hughes, Joseph P. & Lang, William W. & Mester, Loretta J. & Moon, Choon-Geol & Pagano, Michael S., 2003. "Do bankers sacrifice value to build empires? Managerial incentives, industry consolidation, and financial performance," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 417-447, March.
    17. repec:fth:prinin:343 is not listed on IDEAS
    18. Hirschey, Mark, 1985. "Market Structure and Market Value," The Journal of Business, University of Chicago Press, vol. 58(1), pages 89-98, January.
    19. Philip Arestis & Andrew Brown & Malcolm Sawyer, 2001. "The Euro," Books, Edward Elgar Publishing, number 2294.
    20. R. Vander Vennet & O. De Jonghe & L. Baele, 2004. "Bank risks and the business cycle," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/264, Ghent University, Faculty of Economics and Business Administration.
    21. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-332.
    22. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
    23. Thomadakis, Stavros B, 1977. "A Value-Based Test of Profitability and Market Structure," The Review of Economics and Statistics, MIT Press, vol. 59(2), pages 179-185, May.
    24. Altunbas, Y. & Gardener, E. P. M. & Molyneux, P. & Moore, B., 2001. "Efficiency in European banking," European Economic Review, Elsevier, vol. 45(10), pages 1931-1955, December.
    25. David Card, 1995. "The Wage Curve: A Review," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 285-299, June.
    26. Hughes, Joseph P. & Lang, William W. & Mester, Loretta J. & Moon, Choon-Geol, 1999. "The dollars and sense of bank consolidation," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 291-324, February.
    27. De Graeve, Ferre & De Jonghe, Olivier & Vennet, Rudi Vander, 2007. "Competition, transmission and bank pricing policies: Evidence from Belgian loan and deposit markets," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 259-278, January.
    28. Smirlock, Michael & Gilligan, Thomas & Marshall, William, 1984. "Tobin's q and the Structure-Performance Relationship," American Economic Review, American Economic Association, vol. 74(5), pages 1051-1060, December.
    29. Mester, Loretta J., 1996. "A study of bank efficiency taking into account risk-preferences," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1025-1045, July.
    30. Vander Vennet, Rudi, 2002. "Cost and Profit Efficiency of Financial Conglomerates and Universal Banks in Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 254-282, February.
    31. Gonzalez, Francisco, 2005. "Bank regulation and risk-taking incentives: An international comparison of bank risk," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1153-1184, May.
    32. Baele, Lieven & De Jonghe, Olivier & Vander Vennet, Rudi, 2007. "Does the stock market value bank diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1999-2023, July.
    33. Stevens, Jerry L, 1990. "Tobin's q and the Structure-Performance Relationship: Comment," American Economic Review, American Economic Association, vol. 80(3), pages 618-623, June.
    34. Brewer III, Elijah & Jackson III, William E., 2006. "A note on the "risk-adjusted" price-concentration relationship in banking," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 1041-1054, March.
    35. Salas, Vicente & Saurina, Jesus, 2003. "Deregulation, market power and risk behaviour in Spanish banks," European Economic Review, Elsevier, vol. 47(6), pages 1061-1075, December.
    36. Allen, Linda & Rai, Anoop, 1996. "Bank charter values and capital levels: An international comparison," Journal of Economics and Business, Elsevier, vol. 48(3), pages 269-284, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Joseph P. Hughes & Loretta J. Mester, 2013. "Measuring the Performance of Banks: Theory, Practice, Evidence, and Some Policy Implications," Departmental Working Papers 201322, Rutgers University, Department of Economics.
    2. Joseph P. Hughes & Loretta J. Mester, 2018. "The Performance of Financial Institutions: Modeling, Evidence, and Some Policy Implications," Departmental Working Papers 201805, Rutgers University, Department of Economics.
    3. Joseph P. Hughes & Loretta J. Mester, 2008. "Efficiency in banking: theory, practice, and evidence," Working Papers 08-1, Federal Reserve Bank of Philadelphia.
    4. Kozak Sylwester & Wierzbowska Agata, 2021. "Banking Market Concentration and Bank Efficiency. Evidence from Southern, Eastern and Central Europe," South East European Journal of Economics and Business, Sciendo, vol. 16(1), pages 38-52, June.
    5. Khan, Habib Hussain & Ahmad, Rubi Binti & Chan, Sok Gee, 2018. "Market structure, bank conduct and bank performance: Evidence from ASEAN," Journal of Policy Modeling, Elsevier, vol. 40(5), pages 934-958.
    6. Claeys, Sophie & Vander Vennet, Rudi, 2008. "Determinants of bank interest margins in Central and Eastern Europe: A comparison with the West," Economic Systems, Elsevier, vol. 32(2), pages 197-216, June.
    7. Florian Leon, 2015. "What do we know about the role of bank competition in Africa?," CERDI Working papers halshs-01164864, HAL.
    8. Solís, Liliana & Maudos, Joaquín, 2008. "The social costs of bank market power: Evidence from Mexico," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 467-488, September.
    9. Khan, Habib Hussain & Kutan, Ali M. & Naz, Iram & Qureshi, Fiza, 2017. "Efficiency, growth and market power in the banking industry: New approach to efficient structure hypothesis," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 531-545.
    10. Cristian BARRA & Roberto ZOTTI, 2019. "Bank Performance, Financial Stability And Market Concentration: Evidence From Cooperative And Non‐Cooperative Banks," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 90(1), pages 103-139, March.
    11. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, "undated". "The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function," Finance and Economics Discussion Series 1997-09, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    12. Hsing-Chin Hsiao & Mei-Hwa Lin, 2013. "Taiwan second financial restructuring and commercial bank productivity growth," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 12(4), pages 327-350, October.
    13. Manlagñit, Maria Chelo V., 2011. "The economic effects of foreign bank presence: Evidence from the Philippines," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1180-1194, October.
    14. Schure, Paul & Wagenvoort, Rien & O'Brien, Dermot, 2004. "The efficiency and the conduct of European banks: Developments after 1992," Review of Financial Economics, Elsevier, vol. 13(4), pages 371-396.
    15. Pasiouras, Fotios & Tanna, Sailesh & Zopounidis, Constantin, 2009. "The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 294-302, December.
    16. Homma, Tetsushi & Tsutsui, Yoshiro & Uchida, Hirofumi, 2014. "Firm growth and efficiency in the banking industry: A new test of the efficient structure hypothesis," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 143-153.
    17. Cristian Barra & Giovanna Bimonte & Roberto Zotti, 2016. "On the relationship among efficiency, capitalization and risk: does management matter in local banking market?," Applied Economics, Taylor & Francis Journals, vol. 48(41), pages 3912-3934, September.
    18. Otero, Luis & Razia, Alaa & Cunill, Onofre Martorell & Mulet-Forteza, Carles, 2020. "What determines efficiency in MENA banks?," Journal of Business Research, Elsevier, vol. 112(C), pages 331-341.
    19. Horst Gischer & Toni Richter, 2011. "'Global Player' im Bankenwesen - ökonomisch sinnvoll oder problembehaftet?," FEMM Working Papers 110012, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    20. Amel, Dean & Barnes, Colleen & Panetta, Fabio & Salleo, Carmelo, 2004. "Consolidation and efficiency in the financial sector: A review of the international evidence," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2493-2519, October.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:32:y:2008:i:9:p:1820-1835. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.