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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.

Suggested Citation

  • 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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    References listed on IDEAS

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    Cited by:

    1. Mamatzakis, Emmanuel & Matousek, Roman & Vu, Anh Nguyet, 2016. "What is the impact of bankrupt and restructured loans on Japanese bank efficiency?," Journal of Banking & Finance, Elsevier, vol. 72(S), pages 187-202.
    2. repec:eee:ecofin:v:42:y:2017:i:c:p:531-545 is not listed on IDEAS
    3. Ogawa, Kazuo & Imai, Kentaro, 2014. "Why do commercial banks hold government bonds? The case of Japan," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 201-216.
    4. repec:lrk:eeaart:35_3_4 is not listed on IDEAS
    5. 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.
    6. Rahman, Md. Saifur & Noman, Abu Hanifa Md. & Shahari, Farihana & Aslam, Mohamed & Gee, Chan Sok & Isa, Che Ruhana & Pervin, Sajeda, 2016. "Efficient energy consumption in industrial sectors and its effect on environment: A comparative analysis between G8 and Southeast Asian emerging economies," Energy, Elsevier, vol. 97(C), pages 82-89.
    7. repec:taf:oabmxx:v:3:y:2016:i:1:p:1199519 is not listed on IDEAS
    8. Mahmood ul Hasan Khan & Muhammad Nadim Hanif, 2017. "An Empirical Evaluation of ‘Structure-Conduct-Performance’ and ‘Efficient-Structure’ Paradigms in the Banking Sector of Pakistan," SBP Working Paper Series 90, State Bank of Pakistan, Research Department.

    More about this item

    Keywords

    Firm growth; Cost efficiency; Efficient structure hypothesis; Quiet-life hypothesis;

    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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