Firm Growth and Efficiency in the Banking Industry: A New Test of the Efficient Structure Hypothesis

Posted: 8 Jun 2017

See all articles by Tetsushi Homma

Tetsushi Homma

Independent

Yoshiro Tsutsui

Kyoto Bunkyo University

Hirofumi Uchida

Kobe University - Graduate School of Business Administration

Date Written: 2014

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.

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

JEL Classification: L11; G21

Suggested Citation

Homma, Tetsushi and Tsutsui, Yoshiro and Uchida, Hirofumi, Firm Growth and Efficiency in the Banking Industry: A New Test of the Efficient Structure Hypothesis (2014). Journal of Banking and Finance, Vol. 40, pp. 143-153, 2014., Available at SSRN: https://ssrn.com/abstract=2982299

Tetsushi Homma

Independent ( email )

Yoshiro Tsutsui

Kyoto Bunkyo University ( email )

Senzoku-80 Makishimacho
Uji, Kyoto 611-0041
Japan

Hirofumi Uchida (Contact Author)

Kobe University - Graduate School of Business Administration ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501
Japan
81-78-803-6949 (Phone)

HOME PAGE: http://www.b.kobe-u.ac.jp/~uchida

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