Regional Financial Development and Bank Competition: Effects on Firms' Growth

Abstract

Fernández de Guevara J. and Maudos J. Regional financial development and bank competition: effects on firms' growth, Regional Studies. This paper analyses the effect of regional financial development and bank competition on firms' growth using the Spanish provinces as a testing ground. The results show that firms in industries with a greater dependence on external finance grow faster in more financially developed provinces. The results also show that bank monopoly power has an inverted-‘U’ effect on firms' growth, suggesting that market power has its highest effect at intermediate values. The effect is heterogeneous among firms according to the financial dependence of the industry to which they belong. This result is consistent with the literature on relationship banking which argues that bank competition can have a negative effect on the availability of finance for more informationally opaque firms.

Fernández de Guevara J. et Maudos J. Le développement financier régional et la concurrence bancaire: l'impact sur la croissance des entreprises, Regional Studies. En se servant des provinces espagnoles en tant que terrain d'expérimentation, cet article cherche à analyser l'impact du développement financier régional et de la concurrence bancaire sur la croissance des entreprises. Les résultats laissent voir que le taux de croissance des industries qui dépendent davantage du financement externe s'avère plus élevée dans les provinces dont le milieu financier s'annonce plus développé. Les résultats laissent voir aussi que le pouvoir monopolistique des banques a un effet sur la croissance des entreprises sous forme d'une U-inversée, ce qui laisse supposer que le pouvoir du marché est à son maximum pour les valeurs intermédiaires. L'effet est hétérogène parmi les entreprises selon leur degré de dépendance financière. Ce résultat est en accord avec la documentation sur les opérations bancaires relationnelles qui affirme l'impact négatif de la concurrence bancaire sur la disponibilité des finances pour les entreprises à caractère opaque quant à l'information.

Croissance économique Développement financier régional Concurrence bancaire

Fernández de Guevara J. und Maudos J. Regionale Finanzentwicklung und Wettbewerb zwischen Banken: Auswirkungen auf das Firmenwachstum, Regional Studies. In diesem Beitrag analysieren wir die Auswirkung der regionalen Finanzentwicklung und des Bankenwettbewerbs auf das Firmenwachstum anhand des Testbeispiels der spanischen Provinzen. Unsere Ergebnisse zeigen, dass Firmen in Branchen, die stärker auf eine Fremdfinanzierung angewiesen sind, in finanziell höher entwickelten Provinzen schneller wachsen. Ebenso geht aus den Ergebnissen hervor, dass die Monopolstellung von Banken einen umgekehrten U-Effekt auf das Firmenwachstum ausübt, was darauf schließen lässt, dass die Kraft des Marktes bei mittelhohen Werten am wirksamsten ist. Diese Wirkung fällt unter den Firmen je nach der finanziellen Abhängigkeit der Branche, der sie angehören, heterogen aus. Das Ergebnis ist mit der Literatur über Bankbeziehungen konsistent, in der die These vertreten wird, dass sich ein Wettbewerb zwischen Banken negativ auf die Verfügbarkeit von Finanzen für Firmen mit weniger offenen Informationen auswirken kann.

Wirtschaftswachstum Regionale Finanzentwicklung Wettbewerb zwischen Banken

Fernández de Guevara J. y Maudos J. Desarrollo financiero regional y competencia bancaria: efectos sobre el crecimiento empresarial, Regional Studies. En este artículo analizamos el efecto del desarrollo financiero regional y la competencia bancaria en el crecimiento empresarial usando las regiones españolas como laboratorio. Nuestros resultados indican que las empresas en industrias con una mayor dependencia financiera crecen más rápido en las regiones con un mayor desarrollo financiero. Los resultados también indican que el poder de mercado bancario tiene un efecto en forma de U invertida en el crecimiento empresarial, lo que indica que el poder del mercado tiene su mayor efecto en valores intermedios. El efecto es heterogéneo entre las empresas según la dependencia financiera de la industria a la que pertenecen. Este resultado coincide con la literatura la banca relacional que sostiene que la competencia bancaria puede tener un efecto negativo en la disponibilidad de finanticición para las empresas menos transparentes a nivel informativo.

Crecimiento económico Desarrollo financiero regional Competencia bancaria

Keywords:

• Economic growth
• Regional financial development
• Bank competition

JEL classifications:

• D4
• G21
• L11

Acknowledgements

The authors wish to thank four anonymous referees for their valuable comments on this paper. They are also grateful for the financial support of the Fundación Bilbao Vizcaya Argentaria and Instituto Valenciano de Investigaciones Económicas (FBBVA-IVIE Research Program). Joaquín Maudos also acknowledges the financial support of the Spanish Ministry of Education and Science-FEDER through Research Programme Nos SEJ2004-00110, SEJ2005-02776, and SEJ2007–60320/ECON.

Notes

1. For small and medium-sized banks only present in local markets, the relevant market is regional, not national, as papers that focus on country comparisons very often tend to assume.

2. As Dow and Rodríguez-Fuentes (1997) point out, factors related to market structure (concentration ratios, the number of competitors, etc.) have been analysed as explanatory variables of regional interest rate differentials.

3. The other papers estimate a Lerner index for all banking activity as: ratio (price of total assets – marginal costs of total assets)/price.

4. For the specification of the cost function and the expression of the marginal costs, see Maudos and Fernández de Guevara (2007). Symmetry and linear homogeneity in input prices restrictions are imposed.

5. Papers that analyse the effect of financial development on growth with disaggregated information at the industry level use different measures of economic growth: output, value added, sales, the number of firms, and firm size. However, at the firm level it is preferable to use sales growth rather than other indicators of firms' growth such as value added. As Guiso et al. (2004) state, value-added statistics from balance sheet information suffer from differences in accounting practices and methodologies across firms (countries and sectors), resulting in large measurement errors. Differences in methodologies are less of an issue with sales, which is the least ambiguous accounting concept. Indeed, in the present particular case, SABI reports information on sales for a large number of firms.

6. As far as the authors know, this is the only paper that includes credit cooperatives in the analysis of competition for the Spanish banking sector. Although the aggregate for the Spanish credit cooperative banking sector accounts for only about 5% of the total market assets, it should be remembered that these entities play an important role in some provinces.

7. As one of the referees suggested, both measures give different information and both are important. Thus, it is important to know the effect of the overall competition in the market (at provincial level) and also the effect of the market power of the banks with which each borrower has a relationship.

8. The authors have verified the representativeness (by provinces) of the sample used. To this end, the provincial distribution of the sample used (in terms of number of firms) was compared with the provincial distribution of the Directorio central de empresas (DIRCE) (i.e. ‘Central Directory of Firms’) from the Instituto Nacional de Estadística (INE; National Institute of Statistics), which includes the universe of companies operating in Spain. The Pearson correlation coefficient between the two provincial distributions is 0.98. Therefore, the sample is representative by provinces.

9. As mentioned above, the only information available for each bank at the provincial level is the distribution of its branch network.

10. The differences in the Lerner index are much more pronounced at bank level. Thus, banks with high indices (close to 1) coexist with others whose indexes are close to zero.

11. The explanatory power of the estimated model is very small (according to the R 2). This result is due to the presence of a large firm-specific noise that is absent in the studies that use industry data as a result of aggregation. For example, Guiso et al. (2004) also report an R 2 of approximately 0.02 using a large international panel of firm-level data for companies in European Union and transition countries (32 269 observations). However, their R 2's are higher (around 0.36) using industry data.

12. The values of the Lerner indices are in concordance with values estimated in other papers (around 0.24 in Carbó et al., 2003, for the period 1986–99; and 0.23 in Maudos and Pérez, 2003, for the period 1992–2001). Carbó et al. (2005) report similar values of the Lerner index in the loan market.

13. A further reason why a certain level of bank market power may favour economic growth is due to a possible trade-off between bank competition and financial stability, although the theoretical literature is not unanimous on this issue (Allen and Gale, 2004).

14. Results are robust if the sample is split into firms with over 50 employees and those with fewer than 50 employees.

15. As the effect of financial development and bank competition on sales growth is not statistically significant, Table 6 does not report the differential in the real sales growth rate.

16. One must take into account that the financial development indicator is based only on bank credit. Larger firms usually have access to other sources of financing through the market.