Promotional Expenditures, Market Competition, and Thrift Behavior

tising on the performance and asset and liability characteristics of firms Germain Act of 1982 eliminated many of the differences in in the U.S. savings and loan industry over the period 1985 to 1989. The the asset and liability powers of thrifts and other depository results of a simultaneous equation analysis on a sample of 2,534 thrifts institutions. The Financial Institutions Reform, Recovery, and in the Southeast region indicate that promotional expenditures had a Enforcement Act of 1989 and the Federal Deposit Insurance strong positive impact on the profitability of their non-interest business Company Improvement Act of 1991, while restricting the activities. The promotional expenditures of thrifts were found to be posiasset activities of thrifts, provided for the acquisition of thrifts tively related to their investment in nontraditional assets and their reliance by other depository institutions and the conversion of thrifts on purchased funds. The findings indicate that promotional expenditures into other types of depository institutions such as savings have increased due to the increased competition in the local markets as banks and commercial banks. The Riegle-Neal Interstate Banka result of the introduction of interstate banking during the period. J BUSN RES ing and Branching Efficiency Act of 1994 eliminated most of 2000. 50.177–184.  2000 Elsevier Science Inc. All rights reserved. the remaining restrictions imposed by the states on mergers of depository institutions and interstate branching. As a result of these regulatory changes, promotional expenditures and other forms of non-price competition are likely to have an increasingly important influence on the performance of finanPromotional expenditures have been shown to have a cial service firms. positive impact on the performance of firms in a wide This study employs a simultaneous equations analysis to variety of industries. The effect of advertising on the investigate the impact of promotional expenses on the perforperformance of depository institutions has not been extenmance and asset-liability management of savings and loan sively examined. This study extends the literature by empiriinstitutions. The relationship of promotional expenditures to cally investigating the relationship of promotional expendikey firm and market related variables is also explored. This tures to the profitability and asset and liability characteristics study focuses on thrifts because the savings and loan regulaof firms in the U.S. savings and loans industry. tors, unlike the banking regulators, require all thrift instituSignificant regulatory and legislative changes affecting detions to report their promotional expenditures and related pository institutions have occurred since 1980 resulting in a commissions and fees. substantial increase in competition between depository instiThe remainder of the article is divided into five sections. tutions. The provisions of the Depository Institutions DereguThe second section of the article presents a brief review of the literature examining the relationship between promotional expenditures and firm performance. An explanation of the data are presented in the third section. The fourth section Address correspondence to Iftekhar Hasan, SOM, New Jersey Institute of describes the methodology. Section five provides a discussion Technology, Newark, NJ 07102-1982. Tel.: (973) 596-8238; fax (973) 596-3074; E-mail: [email protected] of the results. Section six concludes the paper.