The multibank holding company effect on cost efficiency in banking

Abstract

This paper tests the hypothesis that differences in the organizational form embodied in independent banks, one-bank holding companies, and multibank holding companies result in differences in operating cost efficiency. The transaction and agency cost paradigms for analysis of organizational efficiency provide theoretical motivation for the hypothesis. The effects of organizational form on bank operating expenses for individual banks are evaluated on subsamples divided into quartiles based on total revenue. Results indicate that for banks having revenues in the lowest quartile, both one-bank and multibank holding company affiliates are cost efficient relative to independent banks. Multibank holding company affiliates are cost efficient relative to both one-bank affiliates and independent banks for banks in the interquartile range. No significant differences in cost efficiency are noted banks in the highest revenue quartile. Relative efficiency at the organizational level is also evaluated. Results provide evidence of lower operating costs for banking operations of both multibank and one-bank holding company organizations relative to independent banks. Taken as a whole, the results imply that holding company affiliation conveys cost advantages to banking units below the 75th revenue percentile.