Economies of scale in financial institutions: A general model applied to insurance

This study describes and applies an alternative methodology for measuring economies of scale in financial institutions. A complete model of a profit maximizing financial intermediary is constructed which yields a set of first-order conditions. These together with linear specifications of appropriate revenue and cost functions permit a two-stage estimation of cost and revenue parameters.Application of the model is illustrated by using data from the Canadian general insurance industry. Estimated cost functions suggest (1) that joint stock insurance firms realize no economies of scale from expansion of activity in any one line of insurance but realize diversification economies from writing the same aggregate dollar premiums over appreciably more lines; (2) that mutual companies enjoy direct economies of scale from a simultaneous expansion of insurance lines and, possibly, some diversification economies. Diversification economies may or may not yield special advantages to large firms depending on the competitive state of the reinsurance market.     

Oligopolistic markets with sequential search and production cost uncertainty

This article analyzes a sequential search model where firms face identical but stochastic production costs, the realizations of which are unknown to consumers. We characterize a perfect Bayesian equilibrium satisfying a reservation price property and provide a sufficient condition for such an equilibrium to exist. We show that (i) firms set on average higher prices and make larger profits compared to the scenario where consumers observe production costs, (ii) expected prices and consumer welfare can be non‐monotonic in the number of firms, and (iii) the impact of production cost uncertainty vanishes as the number of firms becomes very large.     

The market for residential real estate brokerage services: Costs of production and economies of scale

Although the market for real estate brokerage services has been the subject of intense scrutiny for many years, little empirical evidence has been forthcoming regarding the performance of this market. This paper employs a translog cost function to model the underlying production function for the residential real estate brokerage industry. The results indicate that, except for very large firms, modest economies of scale persist throughout almost the entire range of output. Our results also indicate that while average firm size is increasing, many real estate firms are too small to take full advantage of the cost reductions possible with a larger scale of operation. Equally important, large firms do not command a competitive advantage over smaller firms, as fer as unit costs are concerned.     

Small Capitalization Companies: What Does Financial Analysis Tell Us about Them?

The study considers a broad range of accounting information and ratios for a group of small and large companies from 1965 through 1980. It seeks to answer the following questions: Are the financial ratios of small companies significantly different from those of larger companies? Are these differences commensurate with relative stock market performance? What are the implications for investors who may wish to invest in small companies, either individually or through mutual funds specializing in the stock of small companies?     

Money Market Funds and Shareholder Dilution

This paper analyzes the effects of a share valuation technique, amortized cost valuation, on institutional money market funds (MMFs) and their investors. The possibility of arbitrage between securities priced at market value and amortized MMFs is investigated. It is found that significant dilution has taken place as a result of this valuation technique. Losses per share have been about 10 basis points per year. Evidence that arbitrageurs will take advantage of a misvaluation of the MMF and cause losses to other shareholders may suggest that some investors should reconsider the desirability of amortized MMFs for their investments.     

中国财产保险市场之竞争测度与结构分析

如果只从市场集中度判定市场竞争的程度,难以客观地反映出真实状况,本文使用Bresnahan与Lau提出的BL模型,利用非结构的方法使用更多信息分析我国财产保险市场。在财险公司追求利润最大化的假设下建立模型,采用2002年至2009年数据,对模型参数进行估计,从而分析我国财险市场竞争情况。研究发现,我国市场属于高度竞争的...     

Restructuring of the Dutch Nonlife Insurance Industry: Consolidation,Organizational Form,and Focus

Since the deregulation of the European insurance market in 1994, Dutch nonlife insurance firms have sized up and increased their focus. Concurrently, the stock organizational form has become increasingly dominant. This article investigates these 1995–2005 trends from a cost‐efficiency perspective. We observe substantial economies of scale that are even larger for smaller firms. In line with the efficient structure hypothesis, both stocks and mutuals are found to have comparative cost advantages. Supporting the strategic focus hypothesis, we find that more specialized insurers have lower costs. Thick frontier efficiency estimates point to large cost X‐inefficiencies that have moderately decreased over time.     

Hybrid markets, tick size and investor trading costs

This paper shows how the tick size affects equilibrium outcomes in a hybrid stock market such as the NYSE that features both a specialist and a limit order book. Reducing the tick size facilitates the specialist's ability to step ahead of the limit order book, resulting in a reduction in the cumulative depth of the limit order book at prices above the minimum tick. If market demand is price-sensitive, and there are costs of limit order submission, the limit order book can be destroyed by tick sizes that are either too small or too large. We show that trading cost is minimized at larger tick sizes for larger market orders, creating an incentive to submit smaller orders when tick size is reduced. With a smaller tick size, specialist participation increases and specialist profit increases slightly for small market orders, and considerably for large market orders.     

Deregulation,technological change,and the business-lending performance of large and small banks

According to DeYoung et al. [Journal of Financial Services Research, 2004] deregulation and technological change has divided the US banking industry into two primary size-based groups: very large banks, specializing in the use of “hard” information to make standardized loans and smaller banks, specializing in the use of “soft” information and relationship development to make non-standardized loans. We evaluate business-lending performance for small and large banks over the 1993–2001 period. Small business lending by small banks is characterized by relationship development and non-standardized loans. Consistent with DeYoung et al.'s model, we find that, after controlling for market concentration, cost of funds, and a variety of other factors that might influence yields, smaller banks perform better than larger banks in the small business lending market. However, larger banks appear to have the advantage in credit card lending, a market characterized by impersonal relationships and standardized loans. Interestingly, we find evidence that larger banks have been making inroads in the market for the smallest business loans, a result consistent with the use of credit scoring by large banks to make very small business loans [Berger et al., Journal of Money, Credit, and Banking, 2004].     

Investigating the cost performance of UK credit unions using radial and non-radial efficiency measures

This paper examines the relative efficiency of UK credit unions. Radial and non-radial measures of input cost efficiency plus associated scale efficiency measures are computed for a selection of input output specifications. Both measures highlighted that UK credit unions have considerable scope for efficiency gains. It was mooted that the documented high levels of inefficiency may be indicative of the fact that credit unions, based on clearly defined and non-overlapping common bonds, are not in competition with each other for market share. Credit unions were also highlighted as suffering from a considerable degree of scale inefficiency with the majority of scale inefficient credit unions subject to decreasing returns to scale. The latter aspect highlights that the UK Government's goal of larger credit unions must be accompanied by greater regulatory freedom if inefficiency is to be avoided. One of the advantages of computing non-radial measures is that an insight into potential over- or under-expenditure on specific inputs can be obtained through a comparison of the non-radial measure of efficiency with the associated radial measure. Two interesting findings emerged, the first that UK credit unions over-spend on dividend payments and the second that they under-spend on labour costs.     

Institutional Trading and Soft Dollars

Proprietary data allow us to distinguish between institutional investors' orders directed to soft-dollar brokers and those directed to other types of brokers. We find that soft-dollar brokers execute smaller orders in larger market value stocks. Allowing for differences in order characteristics, we estimate the incremental implicit cost of soft-dollar execution at 29 (24) basis points for buyer- (seller-) initiated orders. For large orders, incremental implicit costs are 41 (30) basis points for buys (sells). However, we document substantial variability in these estimates, and research services provided by soft-dollar brokers may at least partially offset these costs.     

IPO waves, product market competition, and the going public decision: Theory and evidence

We develop a new rationale for initial public offering (IPO) waves based on product market considerations. Two firms, with differing productivity levels, compete in an industry with a significant probability of a positive productivity shock. Going public, though costly, not only allows a firm to raise external capital cheaply, but also enables it to grab market share from its private competitors. We solve for the decision of each firm to go public versus remain private, and the optimal timing of going public. In equilibrium, even firms with sufficient internal capital to fund their new investment may go public, driven by the possibility of their product market competitors going public. IPO waves may arise in equilibrium even in industries which do not experience a productivity shock. Our model predicts that firms going public during an IPO wave will have lower productivity and post-IPO profitability but larger cash holdings than those going public off the wave; it makes similar predictions for firms going public later versus earlier in an IPO wave. We empirically test and find support for these predictions.     

The Behavior of Stock Prices Around Institutional Trades

All trades executed by 37 large investment management firms from July 1986 to December 1988 are used to study the price impact and execution cost of the entire sequence (“package”) of trades that we interpret as an order. We find that market impact and trading cost are related to firm capitalization, relative package size, and, most importantly, to the identity of the management firm behind the trade. Money managers with high demands for immediacy tend to be associated with larger market impact.     

Determinants of cost efficiencies in the mutual fund industry

We evaluate determinants of cost efficiencies in the U.S. mutual fund industry for 1998-2003. Our empirical results show that cost increases in this industry have been less than proportional to increases in assets. We find that funds without a 12b-1 plan show larger economies of scale than funds with a 12b-1 plan; institutional funds show greater economies of scale than do retail funds; and that fund families that are more focused in their investment objectives reap benefits of lower fund management costs than do fund families that are more diversified in their investment objectives.     

Differences in Information and Common Stock Returns: Estimation Risk or Unequal Distribution of Information?

Information can be differential or “incomplete” in two different ways: as a result of the quality of information itself or as a result of the manner in which information is distributed to investors. The effect on capital market equilibrium under either scenario is that higher returns will be required for low information securities. Prior empirical studies documenting a relationship between low information firms and positive abnormal returns have generally attributed such results to the quality of information; the current research tests the possibility that these results are instead due to the manner in which information is distributed to investors.     

证券投资基金规模适度性研究——基于中国市场的证据

随着社保、养老金等中长期资金的大规模入市,中国公募基金规模面临更快扩张,那么基金规模究竟是可以无限扩张还是存在制约？本文研究发现,基金规模扩张会受到基金经理与投资者之间的委托代理冲突、边际规模报酬递减、投资者大规模赎回的制约。基于此,本文提出了基金管理规模适度区间的概念及其相应计量模型,并借此对2011—2019年间中国公募基金市场规模的适度性进行实证判断和检验,结果显示:(1)中国公募基金的平均管理规模在2015年之前过大,2016年之后趋向适度,而在2019年出现偏小现象。(2)中国基金市场规模适度区间的上、下限呈现逐年减小趋势,但二者的差值,即适度性区间的宽度却逐年增加。(3)规模适度基金的业绩表现远好于规模不足和规模过大两类基金,但市场上的规模适度基金占比则小于另外两类基金。最后,本文就如何提升公募基金,尤其是对安全性和盈利性要求更高的养老保险基金的规模适度性提出了相应对策建议。     

The ageing of Europe: Demographic scenarios of Europe's futures

This paper explores the demographic futures of Europe by presenting two scenarios. The ‘silver century’ scenario is based on the continuation of current demographic trends and policies. In this scenario, Europe's population will continue to age and immigration will be limited. As a result younger people will increasingly tend to concentrate in urban areas while the retirees, who are able, will settle in suburban and rural spaces. In the ‘open borders’ scenario, the EU and most of the member states will introduce an open and actively promoted immigration policy. Most immigrants will concentrate in large metropolitan areas. At the same time there will also be some countries and regions with very limited immigration from abroad. At the local scale immigration will contribute to social and spatial segregation. Hence, without the regulation or at least management of types and destinations of immigration, demographic imbalances will not be addressed at the regional level. Furthermore while the freedom of movement may have some macro-economic benefits and address population imbalances in some (mainly metropolitan) areas, pre-existent trends undermining both socio-economic cohesion and sustainable patterns of development are unlikely to be resolved.     

Control your inventory in a world of lean retailing

As retailers adopt lean retailing practices, manufacturers are feeling the pinch. Retailers no longer place large seasonal orders for goods in advance-instead, they require ongoing replenishment of stock, forcing manufacturers to predict demand and then hold substantial inventories indefinitely. Manufacturers now carry the cost of inventory risk--the possibility that demand will dry up and goods will have to be sold below cost. And as product proliferation increases, customer demand becomes harder to predict. Most manufacturers apply one inventory policy for all stock-keeping units in a product line. But the inventory demand for SKUs within the same product line can vary significantly. SKUs with high volume typically have little variation in weekly sales, while slow-selling SKUs can vary enormously in weekly sales. The greater the variation, the larger the inventory the manufacturer must hold relative to an SKU's expected weekly sales. By differentiating inventory policies at the SKU level, manufacturers can reduce inventories for the high-volume SKUs and increase them for the low-volume ones--and thereby improve the profit-ability of the entire line. SKU-level differentiation can also be applied to sourcing strategies. Instead of producing all the SKUs for a product line at a single location, either offshore at low cost or close to market at higher cost, manufacturers can typically do better by going for a mixed allocation. Low-variation goods should be produced mainly offshore, while high-variation goods are best made close to markets.     

Rationalizing Northern Ireland Hospital Services Towards Larger Providers: Best-Practice Efficiency Studies and Current Policy

This article explores the relative efficiency of Northern Ireland hospitals, and in particular the efficiency of small hospitals relative to their large counterparts, employing a technique called data envelopment analysis. The empirical analysis revealed that larger hospitals displayed higher cost efficiency, higher allocative efficiency and higher technical efficiency than their smaller counterparts. These results support Northern Ireland's recent strategy of concentrating hospital services in six large hospitals, supported by medium sized hospitals, and closing or restructuring smaller hospitals.