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ISSN: 2247-6172 ISSN-L: 2247-6172 Review of Applied Socio- Economic Research (Volume 3, Issue 1/ 2012), pp.88 URL: http://www.reaser.eu e-mail: editors@reaser.eu 2. Literature review and research hypotheses 2.1 Market share and profitability relationship With regard to the sources of competitiveness and profitability of firms, the relationship between market share and profitability is probably the most widely studied single phenomenon in management research (Laverty, 2001). For the past three decades, rich bodies of conceptual and empirical studies on the market share – profitability relationships have been conducted. Scholars argue that the market share reflects the current competitive position that a firm attains in the marketplace, so that firms with high market shares are considered to better satisfy customers’ needs and, therefore, enjoy a competitive advantage against their smaller competitors. Since the first published study reporting a positive market share–profitability association (Gale, 1972), the nature of the relationship between market share and business profitability continues to be an important subject to research in economics 1 . The debate regarding the underlying relationship has been fueled by inconsistencies in the magnitude of the market share-profitability relationship, the statistical significance of this relationship, and the direction of the relationship reported across studies and across models within the same study. Buzzell (2004) notes that the majority of studies on the topic find a linear positive relationship between market share and financial performance. Numerous studies have attempted to measure the determinants of bank profitability in the EU banking system, (e.g., Girardone et al.(2004), Goddard et al. (2004), Athanasoglou et al. (2006) and Athanasoglou et al. (2008). Much of the research on the banking system in Bulgaria is related to its efficiency 2 . There are no studies analyzing the market share – profitability relationship. Moreover, this research paper was initiated by a series of questions: Why are some banks more profitable than others? Are the decision-making factors playing a big role for this? Answers to the questions would be helpful to identify the determinants of bank profitability. The aim of this research is to determine whether there is a relationship between market share and profitability in the Bulgarian banking system. The research evaluates whether being a market leader increases the bank’s ability to earn greater profits. Formally, the first hypotheses to be tested by the analysis are as follows: Hypothesis 1 (H 1 ): There is a positive relationship between the market share of the bank and its profitability. 1 Rumelt, R.P., J.R. Wensley “Market share and business profitability: testing the stochastic hypothesis” 1981; Venkatraman, N., & Prescott, J.E. (1990). The market share–profitability relationship: Testing temporal stability across business cycles. Journal of Management, 16(4), 783–805; Szymanski, D.M., Bharadwaj, S.G., & Varadarajan, P.R. (1993). An analysis of the market share – profitability relationship Journal of Marketing, 57(3), 1–18. 2 Tomova, M., Nenovsky N., and Naneva, T “The efficiency of banking system in CEE: inequality and convergence to the EU”, Financial markets in CEE, Stability and efficiency perspectives), Routledge, London, pp. 225 – 251, 2004; Nenovsky N., P.Chobanov, Mihaylova G. and Koleva D., Efficiency of the Bulgarian Banking System: Traditional Approach and Data Envelopment Analysis, (International Center for Economic Research Working Paper, No 22, 2008
assets revenue assets revenue assets revenue assets revenue Average market share of assets Average market share of revenue ISSN: 2247-6172 ISSN-L: 2247-6172 Review of Applied Socio- Economic Research (Volume 3, Issue 1/ 2012), pp.89 URL: http://www.reaser.eu e-mail: editors@reaser.eu 2.2. Industry concentration and profitability relationship Two theories are proposed to explain how the degree of sector concentration affects bank profitability. The structure-conduct-performance hypothesis (also referred to as the market-power hypothesis) states that a more concentrated sector favors bank profitability motivated by the benefits of greater market power, which reflects the setting of prices that are less favorable to consumers (lower deposit rates, higher loan rates) as a result of competitive imperfections in these markets (monopoly profits). On the other hand, the efficientstructure theory explains the positive relationship between concentration and profitability as an indirect consequence of efficiency. The empirical evidence on the relationship between concentration and profitability is not conclusive. Whereas Claeys and Vander Vennet (2008), among others, report evidence from Europe favoring the structure-conduct-performance theory, other studies (see, for example, Athanasoglou et al., 2008; Berger, 1995) find no relationship between the degree of concentration of the sector and bank profitability; some even show an inverse relationship between the two. Table 1 Market positions of top 10 Bulgarian banks Banks/ total assets and revenue 2007 2008 2009 2010 DSK Bank 13,28 10,7 12,5 9,3 12,16 9,6 11,62 10,2 12,39 10,0 Unicredit Bulbank United Bulgarian Bank 15,34 5,7 15,8 10,8 16,25 9,4 15,72 9,9 15,72 9,0 10,37 8,7 11,1 7,8 11,5 7,9 10,72 8,1 10,92 8,1 Raiffeisenbank 10,12 5,7 9,9 6,0 9,37 5,4 8,9 6,0 9,57 5,8 Eurobank EFG Bulgaria First investment Bank 7,41 5,5 7,8 5,0 8,5 4,5 8,56 5,4 8,07 5,1 7,12 4,3 6,1 3,6 5,78 3,1 6,71 3,3 6,43 3,6 Piraeus bank 6,04 2,7 6 2,7 5,12 2,6 5,53 2,5 5,67 2,6 S.G. Express Bank 3,03 2,3 3,6 2,0 4,08 2,2 3,96 2,3 3,67 2,2 Cibank 2,59 1,7 2,7 1,7 2,71 1,5 2,54 1,5 2,64 1,9 Central and Cooperative Bank 2,65 1,9 2,4 1,5 2,6 1,5 3,1 1,6 2,69 1,6
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