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Banking market structure and corporate investment efficiency

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  • Huynh, Japan

Abstract

The study examines the link between bank competition and firms’ capital investment efficiency. Utilizing a unique dataset comprising Vietnamese listed firms from 2007 to 2022, we suggest that heightened bank competition, as reflected by lower values of concentration ratios, the Lerner index, and the Boone indicator, raises firms’ investment efficiency. Further analysis reveals that bank competition increases investment efficiency specifically in the form of mitigating the underinvestment issue. The validity of the result holds through numerous robustness tests, especially with careful consideration of endogeneity concerns. Through mechanism tests, our study reveals that increased bank competition elevates corporate investment efficiency by mitigating firms’ financing constraints, offering more bank credit, and reducing financing costs. In cross-sectional analysis, we document that the relationship between bank competition and capital investment efficiency is stronger for firms with closer bank-firm ties, greater investment opportunities, and weaker financial positions (captured by firm size, state ownership, and listing location). Further, we observe that the influence of bank competition is attenuated during macroeconomic shocks, as exemplified by the financial crisis and the coronavirus pandemic.

Suggested Citation

  • Huynh, Japan, 2024. "Banking market structure and corporate investment efficiency," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:ecofin:v:74:y:2024:i:c:s106294082400161x
    DOI: 10.1016/j.najef.2024.102236
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    More about this item

    Keywords

    Bank competition; Bank debt; Financing constraints; Investment efficiency; Investment opportunities; Underinvestment;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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