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Firm growth and efficiency in the banking industry: A new test of the efficient structure hypothesis

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  • Homma, Tetsushi
  • Tsutsui, Yoshiro
  • Uchida, Hirofumi

Abstract

In this paper we propose a new test of the efficient structure (ES) hypothesis, which predicts that efficient firms come out ahead in competition and grow as a result. Our test has significant advantages over existing ones, because it is more direct, and can jointly test the so-called quiet-life hypothesis, which predicts that in a concentrated market firms do not minimize costs. We then apply this test to large banks in Japan. Consistent with the ES hypothesis, we find that more efficient banks become larger. We also find that market concentration reduces banks’ efficiency, which supports the quiet-life hypothesis. These findings imply that there is an intriguing growth–efficiency dynamic throughout banks’ life cycle, although our findings also suggest that the ES hypothesis dominates the quiet-life hypothesis in terms of economic impact.

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  • 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.
    • Handle: RePEc:eee:jbfina:v:40:y:2014:i:c:p:143-153
    DOI: 10.1016/j.jbankfin.2013.11.031
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    More about this item

    Keywords

    Firm growth; Cost efficiency; Efficient structure hypothesis; Quiet-life hypothesis;
    All these keywords.

    JEL classification:

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

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