We estimate bankspecific lerner indices as measures of competition and test if cost. We estimate bankspecific lerner indices as measures of competition and test if cost and profitt efficiency are negatively related to market power in the. The purpose of this paper is to examine the empirical effect of competition on cost and profit efficiency in the south african nonlife insurance market in a threestage analysis. Using data on the italian banking industry for the period 19922007, we apply a twostep. The quiet life hypothesis essentially predicts that managers avoid making difficult decisions when they are protected from the disciplinary effects of the capital market. Testing the quiet life hypothesis in the african banking industry by.
In some industries, firms are able to choose who regulates them. Abstract the quiet life hypothesis qlh posits that banks enjoy the advantages of market power in terms of foregone revenues or cost savings. We suggest a uni ed approach to measure competition and e ciency simultaneously to test this hypothesis. Odhiambo january 2018 abstract the quiet life hypothesis qlh is the pursuit of less efficiency by firms. Two qlhrelated hypotheses are stated for the research purposes. The obtained results indicate that there is a negative insignificant link between the level of bank efficiency and market concentration in the local banking industry and thus, the latter allow us to reject the socalled quiet life hypothesis.
Testing the quiet life hypothesis in the italian banking industry paolo coccorese. The relationship between regulators and the regulated in banking richard j. From the perspective of the extended generalizedlerner index egli on the cost frontier, the following two points are noteworthy. Testing the quiet life hypothesis in the italian banking.
In this study, we empirically test quiet life hypothesis, which predicts that managers who are subject to weak monitoring from the shareholders avoid making difficult decisions such as risky investment and business restructuring with japanese firm data. This paper identifies qlhreborn through the holdinglisation strategy of the indonesian government to include all stateowned banks into one holding. Quiet life hypothesis qlh states that banks with a higher market power will generate high profitability quietly, even though it could cause inefficiency. Revisiting the quiet life hypothesis in banking using nonparametric techniques. According to quietlife hypothesis qlh hicks 1935, market power can lead to lower cost efficiency, since it allows managers to enjoy a portion of the monopoly rents in the form of relaxed. The quiet life hypothesis posits that firms with market power incur inefficiencies rather than reap monopolistic rents. However, we do have hypotheses about what the true values are. Testing quiet life hypothesis in the banking sector core.
A sample of 6,500 unit banks is used in a multivariate regression analysis to test the relationship between market concentration and overall risk measured by the coefficient of variation, as well as certain financial ratios. Using data on the italian banking industry for the period 19922007, we apply a twostep procedure. Pdf early studies testing the quiet life hypothesis in banking found strong evidence that banks in more concentrated markets exhibit lower. We suggest a unied approach to measure competition and eciency simultaneously to test this hypothesis. Corporate finance program in this study, we empirically test quiet life hypothesis, which predicts that managers who are subject to weak monitoring from the shareholders avoid making difficult decisions. No 18015, working papers of the african governance and development institute. To investigate the hypothesis, we first estimate the lerner index.
Northholland publishir, g company market power and firm risk a test of the quiet life hypothesis stephen a. Abstractthe quiet life hypothesis posits that firms with market power incur inefficiencies rather than reap monopolistic rents. Testing the quiet life hypothesis in the african banking industry. The final conclusion of the investigator will either retain a null hypothesis or reject. Basic concepts and methodology for the health sciences 3. Quiet life hypothesis qlh is a postulation that large financial institutions would invest less in enhancing financial access through the pursuit of intermediation efficiency. Introduction to hypothesis testing sage publications. We propose a simple adjustment to lerner indices to account for the possibility of forgone rents to test this hypothesis. Pdf testing the quiet life hypothesis in the african. In competitive markets, managers have a strong incentive to give their best effort. The quiet life hypothesis qlh posits that banks enjoy the advantages of market power in terms of foregone revenues or cost savings. Bertrand and mullainathan 2003 find that managers shielded from the threat of takeovers exert less effort to maximize firm value, consistent with a quiet life hypothesis. Research results and conclusions expressed are those of the authors and do not necessarily indicate concurrence by the bureau of the census.
According to quietlife hypothesis qlh hicks 1935, market power can lead to lower cost efficiency, since it allows managers to enjoy a portion of the monopoly rents in the form of relaxed cost management. Revisiting the quiet life hypothesis in banking using. The research is this paper was conducted while we both were research associates at the boston research data center. I study whether the governance role of financial reporting can mitigate adverse effects arising from managerial preferences for a quiet life. Firm growth and efficiency in the banking industry. We suggest a united approach to measure competition and efficiency simultaneously to test this hypothesis. First we estimate banklevel cost efficiency scores and lerner indices.
This chapter investigates the relation between market power and cost efficiency the quiet life hypothesis, and the two competing hypotheses of the relationship between market power and efficiency as well as market concentration on profitability structure conduct performance and efficient structure in the indonesian banking industry from 2002 to 2011. Definition of statistical hypothesis they are hypothesis that are stated in such a way that they may be evaluated by appropriate statistical techniques. Bertrand and mullainathan 2003 showed empirical evidence that is consistent with this extended version of the quiet life hypothesis. The quiet life hypothesis in banking evidence from. Competition and efficiency in the nonlife insurance. According to quiet life hypothesis qlh hicks 1935, market power can lead to lower cost efficiency, since it allows managers to enjoy a portion of the monopoly rents in the form of relaxed. In this study, we assess if powerful banks in the african banking industry are increasing financial access.
There are two hypotheses involved in hypothesis testing null hypothesis h 0. We estimate bankspecific lerner indices as measures of competition and test if cost and profitt efficiency are negatively related to market. Test results are consistent with hicks quiet life hypothesis. In general, we do not know the true value of population parameters they must be estimated. The qlh is therefore consistent with the pursuit of financial intermediation inefficiency by large banks.
Eutz federal reserve board, washington, dc 20551, usa this paper presens an empirical investigation of john r. Hypothesis 1 under the quiet life hypothesis, managers tend to decrease investments even when they have positive net present value to avoid the managerial efforts associated with large investments h1. The quiet life hypothesis in banking evidence from german savings banks abstract the quiet life hypothesis qlh posits that banks enjoy the advantages of market power in terms of foregone revenues or cost savings. This article discusses their diagnostic and prescriptive research, which would appeal to practitioners and academicians in the fields of management, finance, and regulation, beyond the study area, given the. Without competition or monitoring, managers do seem to put off hard decisions. In this study, we assess if powerful banks in the african. These findings imply that there is an intriguing growthefficiency dynamic throughout the life cycle of banks, although yet another finding suggests that the economic impact of the quietlife hypothesis is less significant than that of the efficient structure hypothesis. According to the hypothesis, instead of using their favourable market position to increase the quantity of.
Testing the quiet life hypothesis in the african banking. A hypothesis is a conjectural statement of the relation between two or more variables. Hicks quiet life hypothesis that firms in monopolistic markets will be more risk averse than firms in. The quiet life hypothesis qlh is the pursuit of less efficiency by firms. Pdf testing the quiet life hypothesis in the african banking industry. The quiet life hypothesis in banking evidence from german. For the past few decades, it has been okay to look out for number 1, with the assumption that number 1 refers to an individualistic notion of the personand then mostly in the immediate moment, without regard for the individuals own longterm interests. A null hypothesis is a statement that there is no actual relationship between variables. We suggest a unied approach to measure competition and efficiency simultaneously to test this hypothesis. This article discusses their diagnostic and prescriptive research, which would appeal to practitioners and academicians in the fields of management, finance, and regulation, beyond the study area, given the global. In the long term, it could turn a high profitability into a lower future profitability. In this study, we assess if powerful banks in the african banking. Hicks quiet life hypothesis that firms in monopolistic markets will be more risk averse than firms in competitive market a sample of. The alternative hypothesis states what we think is wrong about the null hypothesis, which is needed for step 2.
These findings imply that there is an intriguing growthefficiency 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. Kerlinger, 1956 hypothesis is a formal statement that presents the expected relationship between an independent and dependent variable. Hypothesis testing one type of statistical inference, estimation, was discussed in chapter 5. Corporate decisionmaking by entrenched managers naoshi ikeda, kotaro inoue, sho watanabe nber working paper no. Pdf competition on the cost frontier and intertemporal. Without competition or monitoring, managers do seem to put off hard. Pdf revisiting the quiet life hypothesis in banking using. Both the quiet life hypothesis and free cash flow hypothesis predict that protected managers will restructure their businesses to a lesser degree than firms with. Chapter 2 research questions, hypotheses, and clinical questions 31 defining the research question brainstorming with teachers, advisors, or colleagues may provide valuable feedback that helps the researcher focus on a specific research question area. A new paper empirically tests this quiet life hypothesis with japanese data. In this paper we test the socalled quiet life hypothesis qlh, according to which firms with market power are less efficient. The quiet life hypothesis essentially predicts that managers avoid making difficult decisions when they are protected from the. Economists from the tokyo institute of technology tested the quiet life hypothesis in the context of management in japan and suggested mechanisms to address the challenges it poses. Pdf the quiet life hypothesis qlh is the pursuit of less efficiency by firms.
Naoshi ikeda, kotaro inoue and sho watanabe no 23804, nber working papers from national bureau of economic research, inc abstract. In this study, we empirically test quiet life hypothesis, which predicts that managers who are subject to weak monitoring from the shareholders avoid making difficult decisions such. Testing the quiet life hypothesis in the african banking industry simplice a. The goal of the current paper is to empirically test the quiet life hypothesis qlh and to investigate the relationship between market concentration and efficiency in the banking sector of latvia, lithuania and estonia. Ho or hn a null hypothesis may read, there is no difference between ho states the opposite of what the experimenter would expect or predict. May 12, 2018 the quiet life hypothesis qlh is the pursuit of less efficiency by firms.
Using data on the italian banking industry for the period 19922007, we apply a two. The qlh is therefore consistent with the pursuit of financial. Sep 26, 2017 bertrand and mullainathan 2003 showed empirical evidence that is consistent with this extended version of the quiet life hypothesis. The relationship between regulators and the regulated in banking federal reserve bank of chicago by. The other type,hypothesis testing,is discussed in this chapter.
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