Firm Growth and Efficiency in the Banking Industry: A new test of the efficient structure hypothesis

Author Name HOMMA Tetsushi  (University of Toyama) /TSUTSUI Yoshiro  (Osaka University) /UCHIDA Hirofumi  (Kobe University)
Creation Date/NO. September 2012 12-E-060
Research Project Research on Efficient Corporate Financing and Inter-firm Networks
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This paper proposes a new test of the efficient structure hypothesis by directly examining the relation between firm efficiency and firm growth. This is also a test of the so-called quiet-life hypothesis. Applying this test to large banks in Japan, we find that more efficient banks become larger, which is consistent with the efficient structure hypothesis. We also find that market concentration reduces banks' cost efficiency, which is consistent with the quiet-life hypothesis. These findings imply that there is an intriguing growth-efficiency dynamic throughout the life cycle of banks, although yet another finding suggests that the economic impact of the quiet-life hypothesis is less significant than that of the efficient structure hypothesis.