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Title | Ownership Concentration and Competition in Banking Markets |
Author | Alexandra Lai and Raphael Solomon |
Type | Working Paper 2006-7 |
Date of publication |
March 2006 |
Language | English |
Abstract |
Many countries prohibit large shareholdings in their domestic banks. The authors examine whether such a restriction restrains competition in a duopolistic loan market. Blockholders may influence managers' output decisions by choosing capital structure, as in Brander and Lewis (1986). For the blockholder, debt has an additional benefit: it "disciplines" a manager by reducing the amount of free cash flow from which the manager can divert funds. A larger blockholder can exert more control. The authors show that an economy with blockholders often leads to a more competitive banking sector. Hence, a restriction on the size of blockholdings has anti-competitive results. |
Bank topic index |
Financial institutions; Financial services; Financial system regulation and policies |
JEL classification |
G21, G28, G32, L10 |
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