Competition in Financial Services: Evidence from British Mutual Funds

Abstract

This paper explores the effects of competition on risk-taking behavior and firm performance within the financial services industry. It does so by exploiting a regulatory change that allowed new players to enter the British mutual fund industry. Exploiting this regulatory shock, we trace non-trivial linkages among industry competition, risk taking, and performance. Greater competition followed the regulatory liberalization, leading to a significant increase in risk-taking behavior of funds. Competition generated performance efficiencies, forcing underperforming funds to exit and halting earlier value-destruction. Competition, however, did not produce tangible cost savings for consumers of investment services.

Keywords: Competition, Deregulation, Entry Barrier, Financial Services, Mutual Funds, Risk, Organizational Form

JEL Classification: G01, G18, G20, G23, G28, G38, L16, D21, K23