Efficiency and Shareholder Value in Australian Banking

Abstract

This paper investigates the influences of efficiency, concentration and market power on the shareholder value of 73 Australian authorised deposit-taking institutions over the 2000-15 period. Four alternative proxies for shareholder value (net interest margin, return on equity, Tobin’s q ratio and economic value-added ratio) are employed to test two competing hypotheses, the structure-conduct-performance hypothesis and the efficient structure hypothesis. Results from panel data analysis show that both hypotheses are applicable to varying degrees to the different aspects of shareholder value. First, the inference that high concentration results in oligopolistic behaviour and collusive arrangements may not apply to the Australian banking sector. Second, enhancement of market power tends to promote economic returns but impedes other facets of performance. Third, technical efficiency has a positive impact on returns on equity, while scale efficiency has a positive influence on market value and a negative influence on interest and returns on equity. Finally, the outcomes indicate that additional control factors, such as size, non-interest income, operating costs, capitalisation, credit risk, inflation, and GDP growth rate, impact significantly on different views of shareholder value.