In this paper we propose a new test of the efficient structure (ES) hypothesis, which predicts that efficient firms come out ahead in competition and grow as a result. Our test has significant advantages over existing ones, because it is more direct, and can jointly test the so-called quiet-life hypothesis, which predicts that in a concentrated market firms do not minimize costs. We then apply this test to large banks in Japan. Consistent with the ES hypothesis, we find that more efficient banks become larger. We also find that market concentration reduces banks' efficiency, which supports the quiet-life hypothesis. These findings imply that there is an intriguing growth-efficiency dynamic throughout banks' life cycle, although our findings also suggest that the ES hypothesis dominates the quiet-life hypothesis in terms of economic impact.

This paper explores whether export intensity and net foreign position of the Japanese firms are carefully watched by investors and are properly reflected in the stock prices. By estimating a multifactor model including the TOPIX, the call rate, the exchange rate, and other variables representing the characteristics of individual firms, the market efficiency of the Japanese stock market has been examined. Novelty of this paper is in that the channels of the effect of exchange rate on stock prices are explicitly formulated and estimated directly, and in that the use of daily data enables knowledge to be gained on the market efficiency. The main results are as follows: (i) Japanese investors adequately consider the characteristics of the firms, such as the exporting behaviour and net foreign position. (ii) The market efficiency of the semistrong form has been improved throughout the period. (iii) Stock investors correctly evaluate firms' foreign asset position and appropriately respond to the change of the exchange rate after 1992. In contrast, investors began to pay attention to exporting firms much earlier, that is, since 1985.