Essays on competitive strategy in regulated industries: Evidence from commercial banking
CitationWilson, Kristin Elizabeth. 2012. Essays on competitive strategy in regulated industries: Evidence from commercial banking. Doctoral dissertation, Harvard Business School.
AbstractThis dissertation studies heterogeneity in firm performance that arises from market failures and the regulation of market failures in the commercial banking industry.
The first essay explores the heterogeneity in firm performance that can arise from exogenously varying levels of oversight in regulated industries. We show that banks located closer to their examination field offices face lower supervision costs that are not explained by leverage. This suggests that regulatory oversight is not purely a burden, but that closer ties with supervisors bring advantages to firms. We hypothesize that these advantages accrue due to co-located banks' lower costs of information exchange. In support of this conjecture, we find that large banks do not benefit disproportionately from proximity to their supervisor, as a collusion-driven explanation would suggest.
The second essay explores whether incumbent firms enjoy a strategic advantage in reducing uncertainty about future demand in highly cyclical industries. I consider this question by studying sources of heterogeneity in financial institutions' ability to manage risk exposures for a highly cyclical, competitive line of business: construction loans. Firms with early investment experience in the construction business demonstrate superior screening capabilities relative to competitors during the building boom. Despite this advantage in identifying idiosyncratic risks across borrowers, experienced banks do not outperform their competitors in limiting their exposure to market risk.
The third essay considers whether the the organization of regulatory enforcement agencies impacts whether regulators' intervene pro-actively in markets, and how regulators respond after a market crisis. I focus on the dramatic growth and equally dramatic collapse of construction lending in the US commercial banking industry as a case study for a highly regulated boom and bust market. I identify differences in policy implementation across firms panel data on banks' supervising agency's structure, resources, and funding incentives, as well as bank examiner turnover and compensation. Among agencies, I do not find differences in the regulation of underwriting quality or in pre-crisis construction market exposures. However, regulatory regime has a significant impact on the rate at which lending contracts after the housing market collapse. Overall, this study shows that differences in the regulatory oversight environment are not necessarily readily apparent in ``boom" markets but likely to have a significant impact on performance in times of crisis.
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