Effects of Market Share on the Bank's Profitability

Abstract

The relationship between market share and profitability is perhaps the most-studied single phenomenon in business policy. The purpose of this study is an attempt to explore the impact of various factors (such as market share, concentration ratio) on profitability measurements of banks in Bulgaria. The analysis is based on balanced panel data of 22 banks over the period 2006 to 2010. For the measurement of bank profitability using one of the most widely used indicators: return on equity (ROE) The main research hypothesis is that the leading banks (on market share) should achieve better profitability. The survey results show that the relationship between market share and profitability of banks is positive and statistically significant. Empirical results confirm that there was no statistically significant relationship between the concentration in the Bulgarian banking sector and its profitability. The estimation results suggest that the profitability of Bulgarian banks is influenced only by factors related to their management decisions and not by changes in the external macroeconomic environment. The findings of this study have several managerial implications. First, the bank can enlarge their market share to improve profitability. Second, bank managers should not worry about the degree of concentration in the industry. Analysis shows that it is management rather than concentration which affects bank profitability.

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