Boundaries of the Firm: Evidence from the Banking Industry

Abstract

Agency theory implies that asset ownership and decision authority are complements. Using 1998 data from Texas commercial banks, we test whether the likelihood of local ownership of bank offices increases with the importance of granting local managers greater decision authority (for example, due to location or customer base). Our empirical evidence is consistent with this hypothesis. It suggests that complementarities between strategy and organizational structure can foster differentiation among firms in terms of location, customers, and products. It also supports the growing view that small locally-owned banks have a comparative advantage over large banks within specific environments.

Keywords: Boundaries of the firm, banking, economics of organizations, ownership incentives; agency theory; decision authority; locational decisions; Riegle-Neal Act; community banks, interstate branching

JEL Classification: G32, L22