Alternative Explanations of Commercial Bank Behavior and the Structure - Conduct - Performance Hypothesis
Clark, Jeffrey Arthur
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https://hdl.handle.net/2142/67670
Description
Title
Alternative Explanations of Commercial Bank Behavior and the Structure - Conduct - Performance Hypothesis
Author(s)
Clark, Jeffrey Arthur
Issue Date
1980
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, General
Language
eng
Abstract
The structure-conduct-performance (S-C-P) hypothesis stresses the importance of market structure in determining the price and output decisions of firms. In particular, the S-C-P hypothesis suggests that the more highly concentrated or less competitive the market, the greater the prices and profits and the smaller the output of firms in the respective markets. This hypothesis has become a cornerstone of antitrust policy in general and bank regulation in particular.
The applicability of the S-C-P hypothesis to the behavior firms in the industrial sector has been supported by a large volume of empirical evidence. The results obtained from the commercial banking industry are less supportive of the relevance of the S-C-P hypothesis to bank behavior. Questions concerning the source(s) of this weakness remain.
The S-C-P hypothesis implicitly assumes that firms attempt to maximize their profits. The complexity of the organizations and their decisions making as well as the pursuit of a multiplicity of firm objectives suggest that satisficing behavior maybe a better assumption about firm behavior than profit maximization.
The ability to pursue nonprofit objectives is regarded as being enhanced by the presence of imperfect capital and product markets facing firms in the industry and a separation of ownership of the firm from control. Both of these conditions appear to be present for a large number of commercial banks thus making them prime candidates for satisficing behaviors.
This study examines the nonprofit goals of increasing bank size and reducing bank risk exposure both theoretically and empirically. This is accomplished through the application of the Sales Maximization and Certainty Equivalent of Profit models to a general model of a commercial bank. The results of these theoretical models provide a basis for the specification of several equation recursive, simultaneous equations models which are estimated using Ordinary Least Squares and Three Stage Least Squares estimation techniques. The results obtained from the estimation of these empirical models are employed in examining the relevance of the two nonprofit maximizing goals to commercial bank behavior and to the weakness of the S-C-P hypothesis in commercial banking.
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