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

• Published in: Journal of banking & finance 2014-03, Vol.40, p.143-153
• Main Authors: Homma, Tetsushi, Tsutsui, Yoshiro, Uchida, Hirofumi
• Format: Article
• Language: English
• Subjects: Banking industry; Business growth; Competitive advantage; Cost efficiency; Economic impact; Efficiency; Efficient structure hypothesis; Firm growth; Hypotheses; Predictions; Quiet-life hypothesis; Studies
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2013.11.031

•We test the efficient structure (ES) hypothesis examining growth of efficient firms.•We also examine bank efficiency and concentration and test the quiet-life hypothesis.•Both hypotheses are supported using panel data on large Japanese banks.•The ES hypothesis has greater economic impact than the quiet-life hypothesis.•Our findings imply intriguing growth–efficiency dynamics over banks’ life cycle. 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.