Competition in Financial Services: Evidence from British Mutual Funds

Abstract

This article 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 nontrivial 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. © 2012, Cornell Law School and Wiley Periodicals, Inc.