Over 70 empirical studies of entry and exit patterns covering eleven different countries generally support the expectation that entry is more frequent in more profitable, rapidly growing industries, and slower where the absolute costs of capital required to build a minimum efficient scale plant are imposing. Scale economies, excess capacity, and limit pricing receive little empirical support as entry impediments. The evidence concerning the effects of advertising and R&D intensity is confusing. Exit is faster where profits are lower, and slower where durable specific (sunk) capital costs are more important. Exit and entry are strongly correlated, probably due to displacement (of incumbents by more efficient entrants) and vacuum effects (in which entrants are enticed by the prospects of selling to uncommitted customers abandoned by a recent exit).

Empirical studies of entry and exit: A survey of the evidence

Gender bias and the availability of business loans

This paper examines the prices bid for target banks in the early to mid-1980s. Two hypotheses are examined: (1) the earnings diversification hypothesis which holds that banks would bid more for merger partners that offered risk-reduction opportunities, and (2) the deposit insurance put-option hypothesis, which holds that acquirers would bid more for targets that offered opportunities to increase risk and/or become 'too big to fail.' An empirical analysis of a sample of 302 mergers produces results that are consistent with the earnings diversification hypothesis and inconsistent with the deposit insurance put-option hypothesis. Copyright 1995 by Ohio State University Press.

Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option versus Earnings Diversification

A model of multimarket spatial competition is developed where small, single-market banks compete with large, multimarket banks (LMBs) for retail loans and deposits. Consistent with empirical evidence, LMBs are assumed to have different operating costs, set retail interest rates that are uniform across markets, and have access to wholesale funding. If LMBs have significant funding advantages that offset any loan operating cost disadvantages, then market-extension mergers by LMBs promote loan competition, especially in concentrated markets. However, such mergers reduce retail deposit competition, especially in less concentrated markets. Prior empirical research and our own analysis of retail deposit rates support the model's predictions.

Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation

Accounting information and internal performance evaluation Evidence from Texas banks

An analysis of the concept of corporate separateness in BHC regulation from an economic perspective

The prospect of unlimited nationwide banking raises a question about the viability of small independent banks in competition with large, geographically diversified banking organizations. This study addresses the issue of small bank viability by focusing on the relative performance of independent banks and bank holding company subsidiaries in a regime of intrastate banking, where “performance” is measured by the cumulative change in a bank's local market share over time. Two regression equations of the same general form are estimated using the same sample of independent and affiliated banks, albeit for different time periods to distinguish between the short-term and long-term effects of affiliation. Regression results indicate that affiliation with a geographically diversified bank holding company generally provides no significant long-term competitive advantage (in terms of market share accumulation) for holding company subsidiaries over independent banks. The only exception is a modest benefit afforded to banks with relatively small pre-acquisition market shares that are acquired by larger bank holding companies as initial entry vehicles into new markets.

Geographic diversification in banking, market share changes, and the viability of small independent banks

This study reexamines whether the IRR method implicitly assumes a reinvestment rate. Using a numeric example, we show the IRR as a constant rate of return on the declining balance of the investment, with neither an implied disposition of the intermediate cash flows nor an implicit rate of return on any reinvested cash flows. Analogous examples are presented for a coupon bond purchased at a premium and a fully amortized loan. Rewriting the IRR equation may appear to justify an implicit reinvestment rate, but such a view is shown to be incorrect. These findings suggest that finance textbooks should disavow any implicit reinvestment rate assumption in the IRR technique. Further, textbooks should highlight the IRR as the rate of return on the declining balance of the investment, analogous to the YTM on a premium bond and the contract rate on a fully amortized loan.INTRODUCTIONSince the mid-1950s both academics and practitioners have explored the question of whether an implicit reinvestment rate is embedded in the internal rate of return (IRR) method. Specifically, does the IRR technique implicitly assume that the intermediate cash flows generated by a capital investment project are reinvested at a rate equal to the IRR? A companion issue is whether the net present value (NPV) technique subsumes that the intermediate cash flows are reinvested at the project's cost of capital. The focus of this study is to demonstrate the absence of any such reinvestment rate assumption within the IRR method. With no reinvestment rate assumption embedded in the IRR technique, no reason exists to expect an implicit reinvestment rate in the NPV method or any other hurdle-decision model.Debate over the reinvestment rate assumption has spilled over into introductory finance textbooks as some authors have accepted the notion of a reinvestment rate assumption and highlighted it in their discussion of IRR while others have explicitly rejected the idea. Still others have omitted any mention of it, perhaps because they do not believe it or because they view it as insufficiently important or too controversial for an introductory text.This study reexamines the question of a reinvestment rate assumption embedded in the IRR technique in five sections. First, we review the academic and practitioner literature relating to the issue. Second, we discuss textbook coverage of the issue based on a sample of introductory finance texts. Third, using a numeric example we present the IRR of a capital investment project as a constant rate of return on the declining balance of the investment to its terminal value. Similarly, the yield to maturity (YTM) on a coupon bond purchased at a premium can be shown as a constant rate of return on the declining value of the bond to maturity. Likewise, the contract rate on a fully amortized loan represents a constant rate of return on the declining balance of the loan. In all of these investments neither a disposition of the net cash flows from the investment nor a reinvestment rate is implied. In the fourth section we show how rewriting the IRR equation may appear to justify an implicit reinvestment rate, but then we explain how such a view is incorrect. Finally, we provide a summary and conclusion in which we make two recommendations: that finance textbooks disavow any implicit reinvestment rate assumption in the IRR method (perhaps noting the debate over the issue in an appendix), and that textbooks highlight the IRR as the rate of return on the declining balance of the investment, analogous to the YTM on a premium bond and the contract rate on a fully amortized loan.LITERATURE REVIEWSo what spawned the early discussion in the 1950s about an implicit reinvestment rate assumption within the IRR method? The answer lies in the possible conflict in ranking between the NPV and IRR techniques for two mutually exclusive projects where the NPV profiles of the projects intersect at some discount rate. …

John T. Rose

Papers

An analysis of the concept of corporate separateness in BHC regulation from an economic perspective

Geographic diversification in banking, market share changes, and the viability of small independent banks

Re-Examining an Old Question: Does the IRR Method Implicitly Assume a Reinvestment Rate?

Statistical cost accounting models in banking: a reexamination and an application

Diversification and barriers to entry: Some evidence from banking