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The Impact of Local Knowledge on Banking

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  • Robert Bird

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  • John Knopf

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Abstract

We use firm-level data to study how local knowledge impacts the wage and profitability of commercial banks. Using a novel regulatory and competitive environment as a natural experiment, we find that restrictions on the mobility of local knowledge negatively impact the incidence of new bank charters. Also consistent with expected theory, we also find no impact on banks formed through mergers or acquisition where the acquiring bank can simply purchase the local knowledge available. We also find that restrictions on the mobility of local knowledge decrease labor expenses. This supports the hypothesis that such mobility restrictions enable employers to extract rents from workers who lack bargaining power arising from a potential job change to a local rival. We also find that increases in labor restrictions are positively correlated with profitability, benefiting established banks because it restricts competitive with potential new banks that could potentially exploit local knowledge more effectively. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Robert Bird & John Knopf, 2015. "The Impact of Local Knowledge on Banking," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(1), pages 1-20, August.
  • Handle: RePEc:kap:jfsres:v:48:y:2015:i:1:p:1-20
    DOI: 10.1007/s10693-014-0203-9
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    File URL: http://hdl.handle.net/10.1007/s10693-014-0203-9
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    References listed on IDEAS

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    Cited by:

    1. repec:asi:adprev:2017:p:191-198 is not listed on IDEAS
    2. Atul Teckchandani, 2016. "Bank Ownership and Lending Behaviours: The Relevance of Community Links," Economic Affairs, Wiley Blackwell, vol. 36(2), pages 168-174, June.
    3. repec:eee:jfinec:v:128:y:2018:i:2:p:266-286 is not listed on IDEAS
    4. Baghai, Ramin P. & Silva, Rui C & Ye, Luofu, 2018. "Teams and Bankruptcy," CEPR Discussion Papers 13198, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Local knowledge; Banking; Covenants not to compete; J61; K31; G21;

    JEL classification:

    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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