The impact of institutional market power on excess returns of wealth management products in China

By utilizing detailed data on wealth management products (WMPs) disclosed after the promulgation of the New Asset Management Regulation (NAMR), we empirically investigate the impact and transmission channels of deposit market power on excess returns of WMPs in China, and two main conclusions are drawn. First, banks’ deposit market power is significantly and positively correlated with excess returns of WMPs. Second, this relationship is mainly transmitted through two pathways, banks’ risk-taking measured by Z-score and banks’ net interest margin (NIM). Despite the result that deposit-side market power affects the performance of WMPs, further analyses reveal that the overall market power of banks exerts positive yet insignificant effect on excess returns of WMPs. Our study offers a new perspective to understand the underlying role of institutional market power. The results indicate that banks with stronger deposit market power tend to launch WMPs more appealing to investors. We fill a long-standing research gap regarding micro-level channels between market power and WMPs’ performance, thus carry crucial theoretical and practical implications.