James A. Verbrugge

The Marketing/Finance Interface: Two Divergent and Complementary Views of the Firm

Abstract Economics is the mother discipline of both marketing and finance. In recent years, marketing researchers have largely looked to scholars in psychology and sociology for inspiration. The economic roots of marketing are sometimes forgotten. One way to recapture this lost heritage is by turning to the sister discipline of finance, an area of inquiry that has made great strides in terms of applying economic principles to business problems. The purpose of this special issue is to explore the interface between marketing and finance. The following essay provides an introduction to this issue. It also provides a background for thinking about the ways in which the two disciplines diverge and the ways in which they are complementary.

Small bank loan quality in a deregulated environment: the information advantage hypothesis

Abstract A number of studies and banking practitioners have questioned the ability of small banks to survive in a deregulated environment. We consider the hypothesis that small community banks actually have an information advantage in evaluating and monitoring loan quality. We call this the information advantage hypothesis (IAH). We evaluate four loan quality measures for a sample of all Florida banks for the period 1986 to 1996. There is no systematic evidence that loan quality is greater at small banks. Both net chargeoffs and loan loss provisions are lower at small banks in non metropolitan areas than at other banks, which is consistent with the IAH. However, other measures of loan quality—nonperforming loans and other real estate owned—are higher at small banks.

Investment policy, financing policy, and performance characteristics of de novo savings and loan associations☆

Abstract This paper develops a simultaneous equation model to investigate the investment policies, financing policies, and risk/return characteristics of de novo thrift institutions. A model to explain state entry rates for de novo institutions is also presented. Entry dates are significantly influenced by investment powers as the numbers of de novo charters are found to be significantly higher in states with the most liberal set of permissible activities. Economic growth and the demand for financial services also contributed to higher entry rates. Utilization of the liberal powers did not, however, contribute positively to returns. Firms with riskier asset portfolios were found to have lower realized returns. Efficiency in operations and strong capitalization were found to be positively associated with higher returns.

Risk taking and failure in de novo savings and loans in the 1980s

This article examines failure rates in de novo S&Ls that initiated operations during the 1980–1986 period. Overall failure rates are similar to those for existing institutions but are found to vary significantly by location, time of charter, and organizational form. Both univariate tests and results from a probability-of-failure model indicate that inadequate capital, economic stress, poor management of higher risk lending allowed by broader powers, and operating inefficiencies contributed significantly to the likelihood of failure. Use of brokered funds and rapid asset growth are also significantly related to failure likelihood. Interestingly, for those S&Ls which eventually failed, rapid asset growth and high proportions of nonperforming assets actually delayed the timing of their failure. We interpret this to be the result of regulatory forbearance. We also find significant differences between the financial characteristics of de novo and non-de novo S&Ls.

Special Issue on the Marketing/Finance Interface

Many special issues begin with a recognition of the of applied economics. Similarly, marketing is an applied social science, as the field of academic marketing traces its history growth that has taken place in a topic area, over the last 20 years or so. Specifically, JBR special editors back to the mother disciplines of economics, sociology, and psychology. Since the 1960s, psychology has been the domidescribe an increase in the quality and quantity of articles published on a particular topic area (e.g., Interpersonal Buyer nant force that drives marketing research, while economic’s origin has been ignored in most circles. Again, the editorial Behavior, The Role of Affect in Marketing). It is certainly true that research in finance has made tremendous strides in the last board of JBR reflects this fact, as a large contingent of board members specialize in “Buyer Behavior,” often with a psycho30 years. The work of financial scholars has had an important impact on financial practice, perhaps most visibly in the option logical bent but rarely with a purely economic focus. In the 1990s, some marketing scholars have begun to turn pricing area. At the same time, certain kinds of finance professors can command very large salaries on Wall Street. In other to economics for inspiration, especially with regard to research on strategy. Industrial organization economics is especially words, the work of some finance professors has tangible value in the marketplace. useful for explaining the kinds of strategic decisions that managers make, as are game theory and transactions cost theory. Published research in marketing has proliferated, both in terms of quantity and in terms of quality. Nonetheless, there Thus, at a time when some marketing scholars are returning to their “economics” roots, it makes sense to publish a special has not been a big explosion in the amount of work done at the interface of these two disciplines. To a large degree, finance issue that highlights the interface between marketing and finance. and marketing remain as separate or isolated fields of study. One of the goals of the Journal of Business Research is to In an academic setting, marketing and finance professors rarely interact. They seem to live in two worlds that overlap “recognize the intricate relationships between the many areas of business activity.” Under “Aims and Scope,” both marketing only in indirect ways. The same condition exists in a business setting. This tendency to congregate in functional silos has and finance are specifically listed as important business activities that receive regular evaluation in JBR. Thus, this special been termed an “old management paradigm” (Locander and Goebel, 1997). Under this older view, the firm is viewed as issue is of interest because it combines two areas that often consisting of discrete units. Each unit acts autonomously, and are kept separate in the journal itself. In March 1998, there each pursues its own measure of performance (Zinkhan and were seven members of the JBR Editorial Board who are listed Zinkhan, 1997). From a marketing perspective, managers freas specializing in the areas of “Finance and Accounting.” By quently focus on customers or accounting profits, as the ultiway of contrast, there are 49 Review Board Members who mate objective. In contrast, financial managers focus on sharehave a special focus on “Marketing” and 42 more who have holder wealth (Zinkhan and Zinkhan, 1997). a speciality in “Buyer Behavior,” which can be viewed as a Recently, however, the two areas have moved closer tosub-discipline of marketing. gether in practice, especially in firms that have begun to focus In this issue, we attempt to link these two somewhat dispamore intensively on managing to enhance economic value. In rate areas. On the surface, there should be many links. Finance these approaches, all parts of the organization are “linked” evolved from economics, and finance can be viewed as a kind into a common framework. The most well-known of these approaches is the “economic value added” approach (EVA) Address correspondence to George M. Zinkhan, University of Georgia Terry developed by Stern Stewart & Co. (Ehrbar, 1998). Based on College of Business, 138 Brooks Hall, Athens, GA 30602-6258. Tel.: (706) 5423757; fax: (706) 542-3738; E-mail: gzinkhan@cba.uga.edu pioneering work in organizational economics and agency cost

Scale economies in the savings and loan industry before diversification

Abstract This study investigates scale economies in the savings and loan (S&L) industry prior to deregulation. Use of the translog cost function permits the estimation of U-shaped cost curves and of separate scale and branch size eonomies. The model also allows the cost elasticities to vary by size of financial institution. The model is estimated on a large nationwide sample of savings and loan associations. The results indicate significant economies of scale over a wide range of output for institutions that engage in traditional specialized activities.

Do Small Banks Have an Advantage in Lending? An Examination of Small Business Lending Performance for Large and Small Banks

Consolidation in the banking industry has sparked concern about the survival of small banks. However, if small banks are better at processing credit information than large banks, they should continue to survive in a competitive environment. We evaluate risk-adjusted commercial loan yields (gross yields less net charge-offs and the risk-free rate) at small and large banks for 1996 through 1999. We find that risk-adjusted yields fall as the proportion of small business loans (i.e., original amounts less than

Do Small Banks have an Advantage in Lending? An Examination of Risk-Adjusted Yields on Business Loans at Large and Small Banks

1 million) increase. However, smaller banks earn greater risk-adjusted yields than larger banks. Our results suggest that small banks make better choices from the available small business loans. This finding is consistent with the notion that these banks have an information advantage in evaluating credit and adds to our understanding of the intermediation process.