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Bank marketing investments and bank performance

  • Donald J. Mullineaux
  • Mark K. Pyles,
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    Purpose – The purpose of this paper is to examine empirically the effects of investments by US banks in advertising and promotion on their performance in the areas of profits and market share. Design/methodology/approach – The model presented in the paper is motivated by the theory of the profit function. We estimate a base model with a fixed-effects panel including an AR(1) disturbance over the period 2002-2006. To test for selection bias, we also estimate a Heckman model. Findings – It is found that bank profits and market share increase significantly with increased spending on advertising and promotion. Also, significant evidence is found of increasing returns to scale in this type of marketing expenditure. It is also found that increased expenditures on branching result in higher profits and increased market share, but without scale effects. The results are robust, the inclusion of variables is not suggested by profit function theory and corrected for prospective selection bias. Originality/value – The extant literature does not include research on the effectiveness of bank marketing from the viewpoint of its impact on profit performance. The findings should be of interest to academics in finance and marketing and to banking practitioners.

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    Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

    Volume (Year): 2 (2010)
    Issue (Month): 4 (December)
    Pages: 326 - 345

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    Handle: RePEc:eme:jfeppp:v:2:y:2010:i:4:p:326-345
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    1. Flannery, Mark J, 1982. "Retail Bank Deposits as Quasi-Fixed Factors of Production," American Economic Review, American Economic Association, vol. 72(3), pages 527-36, June.
    2. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, 1996. "The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function," Center for Financial Institutions Working Papers 96-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
    3. Zantout, Zaher Z & Tsetsekos, George P, 1994. "The Wealth Effects of Announcements of R&D Expenditure Increases," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(2), pages 205-16, Summer.
    4. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    5. Berger, Allen N. & Leusner, John H. & Mingo, John J., 1997. "The efficiency of bank branches," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 141-162, September.
    6. Allen N. Berger & Timothy H. Hannan, 1988. "The price-concentration relationship in banking," Finance and Economics Discussion Series 23, Board of Governors of the Federal Reserve System (U.S.).
    7. Sam Peltzman, 1977. "The Gains and Losses From Industrial Concentration," NBER Working Papers 0163, National Bureau of Economic Research, Inc.
    8. Baltagi, Badi H. & Wu, Ping X., 1999. "Unequally Spaced Panel Data Regressions With Ar(1) Disturbances," Econometric Theory, Cambridge University Press, vol. 15(06), pages 814-823, December.
    9. Jalal Akhavein & PVBA Swamy & Stephen Taubman, 1994. "A General Method of Deriving the Efficiencies of Banks from a Profit Function," Center for Financial Institutions Working Papers 94-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
    10. Eero Kasanen, 1993. "Creating Value by Spawning Investment Opportunities," Financial Management, Financial Management Association, vol. 22(3), Fall.
    11. Berger, Allen N, 1995. "The Relationship between Capital and Earnings in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 432-56, May.
    12. Bert Scholtens, 2000. "Competition, Growth, and Performance in the Banking Industry," Center for Financial Institutions Working Papers 00-18, Wharton School Center for Financial Institutions, University of Pennsylvania.
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