Bank Market Power, Firm Performance, Financing Costs and Capital Structure

Marisa Pessoa Gonçalves, Pedro M. Nogueira Reis and António Pedro Pinto ()
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Marisa Pessoa Gonçalves: Department of Management, Higher School of Technology and Management, Polytechnic Institute of Viseu, 3504-510 Viseu, Portugal
Pedro M. Nogueira Reis: Department of Management, Higher School of Technology and Management, Polytechnic Institute of Viseu, 3504-510 Viseu, Portugal
António Pedro Pinto: Department of Management, Higher School of Technology and Management, Polytechnic Institute of Viseu, 3504-510 Viseu, Portugal

IJFS, 2024, vol. 12, issue 1, 1-21

Abstract: In this study, we provide a thorough analysis, conducted on a company-by-company basis, of the impact of bank concentration and the bank-relative power of banks on firm profitability, financing costs, and capital structure in a small economy like Portugal. Using a sample of 434,990 Portuguese companies, the study spans a time frame of 13 years (from 2006 to 2018). Principal component analysis (PCA) was used to determine bank concentration, and a new variable, “bank-related power”, was introduced. This work employed linear regression with static panel data for fixed and pooled effects, using Driscoll–Kraay standard errors and robust standard error estimation. A direct association was found between business performance and the use of bank credit in highly concentrated banking markets (SMEs), and there is evidence of an inverse relationship when the relative power of banks increases (small business). Evidence also shows that financing costs increase with greater bank concentration, while firms’ capital structure improves under similar conditions. When a bank holds greater relative market power, it tends to exert a negative impact on the capital structure of large companies. However, an inverse relationship is observed in the case of SMEs. Unlike previous studies, the article assesses the effects of bank market power on each of the different companies involved by using both bank concentration (as a composite variable) and a new variable that measures the relative power of banks. Due to its extensive database and expanded time frame, this research is innovative in the context of small-sized companies.

Keywords: bank market power; bank concentration; relative power of banks; performance; financing costs; capital structure (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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