The relationship between charter value and bank market concentration: the influence of regulations and institutions

Abstract

This article analyses the influence of regulations and institutions on the relationship between market concentration and bank charter value by applying a simultaneous equations model to a sample of 276 banks in 27 countries. Results highlight that the role of the structure–conduct–performance (SCP) and the efficient-structure (EFS) hypotheses in explaining a positive relationship between bank charter value and market concentration depends on a country's regulatory and institutional set-up. The validity of EFS forecasts compared to SCP forecasts increases in line with the quality of the legal environment and enforceability of contracts, with the increased weight of the markets compared to banks and with the share of banking assets held by banks that are majority-owned by foreign owners and by the government. In contrast, tighter legal restrictions on the activities banks are allowed to pursue limit the validity of both the EFS and SCP hypotheses.

Acknowledgements

I am grateful to Ana Isabel Fernández, Ana Rosa Fonseca, Fernando Gascón, Víctor González and Ximo Maudós for their helpful comments and suggestions. I also wish to thank Fernando Gascón and Juan Ramón Fernández for their help with data. Financial support provided by the Regional Government, Project FC-00-IN-39 and by the Spanish Science and Technology Ministry (MCT), Project SEC2002-04765 are gratefully acknowledged.

Notes

¹ See, among others, Barth et al . (2001, 2004), La Porta et al . (2002) and Beck et al . (2003).

² To test the sensitivity of Tobin's Q and accounting rates of return to measurement errors, McFarland (1988) used Monte Carlo experiments to determine which accounting measure provides the best approximation to its ‘true’ measure. They found that Q estimates have smaller average errors than accounting rate of return measures. In addition, the Q ratio was found to have a much higher average correlation with its true measure.

³ These types of submissions are: (1) draft by-laws, (2) intended organizational chart, (3) first 3-year financial projections, (4) financial information on main potential shareholders, (5) background/experience of future directors, (6) background/experience of future mangers, (7) sources of funds to be used to capitalize the new bank and (8) intended differentiation of new bank from other banks.

⁴ Only the direct effect is described, as the reduced form of the system of equations would have to be estimated for the total effect to be known.