Finance and Efficiency: Do Bank Branching Regulations Matter?

66 Pages Posted: 26 Jun 2007

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Jean M. Imbs

Paris School of Economics (PSE); NYU Abu Dhabi; Centre for Economic Policy Research (CEPR)

Jason Sturgess

Queen Mary University of London

Multiple version iconThere are 4 versions of this paper

Date Written: March 2007

Abstract

We use portfolio theory to quantify the efficiency of state-level sectoral patterns of production in the United States. On the basis of observed growth in sectoral value-added output, we calculate for each state the efficient frontier for investments in the real economy. We study how rapidly different states converge to this benchmark allocation, depending on access to finance. We find that convergence is faster - in terms of distance to the efficient frontier and improving Sharpe ratios - following intra- and (particularly) interstate liberalization of bank branching restrictions. This effect arises primarily from convergence in the volatility of state output growth, rather than in its average. The realized industry shares of output also converge faster to their efficient counterparts following liberalization, particularly for industries that are characterized by young, small and external finance dependent firms. Convergence is also faster for states that have a larger share of constrained industries and greater distance from the efficient frontier before liberalization. These effects are robust to industries integrating across states and to the endogeneity of liberalization dates. Overall, our results suggest that financial development has important consequences for efficiency and specialization (or diversification) of investments, in a manner that depends crucially on the variance-covariance properties of investment returns, rather than on their average only.

Keywords: Diversification, Financial development, Growth, Sharpe ratio, Volatility

JEL Classification: E44, F02, F36, G11, G21, G28, O16

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Imbs, Jean M. and Imbs, Jean M. and Sturgess, Jason, Finance and Efficiency: Do Bank Branching Regulations Matter? (March 2007). CEPR Discussion Paper No. 6202, Available at SSRN: https://ssrn.com/abstract=996717

Viral V. Acharya (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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Centre for Economic Policy Research (CEPR) ( email )

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Jean M. Imbs

Paris School of Economics (PSE) ( email )

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NYU Abu Dhabi ( email )

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United Arab Emirates

Centre for Economic Policy Research (CEPR) ( email )

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Jason Sturgess

Queen Mary University of London ( email )

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United Kingdom

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