Competition versus Efficiency: What drives franchise values in European banking?

Olivier De Jonghe and Rudi Vander Vennet

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper investigates how stock market investors perceive the impact of market structure and efficiency on the long-run performance potential of European banks. To that end, a modified Tobin’s Q ratio is introduced as a measure of bank franchise value. This measure is applied to discriminate between the Market Structure and Efficient-Structure hypotheses in a coherent forward-looking framework, in which differences in banks’ horizontal and vertical differentiation strategies are controlled for. The results show that banks with better management or production technologies possess a long-run competitive advantage. In addition, bank market concentration does not affect all banks equally. Only the banks with a large market share in a concentrated market are able to generate non-competitive rents. The paper further documents that the forward-looking, long-run perspective and the noise adjustment of the performance measure overcome most of the drawbacks associated with testing these hypotheses in a multi-country set-up. Finally, notwithstanding the international expansion of bank activities, the harmonization of regulation and the macroeconomic convergence in the European Union (EU15), we still find that country-specific macroeconomic variables have a significant impact on bank performance. The findings indicate that there is a trade-off between competition and stability that should be taken into account when assessing mergers or acquisitions.

Keywords: charter value; market power; efficiency; Tobin’s Q; stochastic frontier (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 L11 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-12
New Economics Papers: this item is included in nep-ban, nep-com, nep-eec and nep-eff
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Competition versus efficiency: What drives franchise values in European banking? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:07/491

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