Internal Communication and Performance in Banking Organizations

I investigate the relationship between internal communication costs and performance in banking organizations. I consider banking organizations with a Bank Holding Company (BHC) and several bank subsidiaries (bank), and study the performance impact of costs of communication between these units. I use the introduction of new airline routes that reduce travel time between two units as an exogenous variation in communication costs between these units. I find that a new BHC-to-bank route has two effects. On the one hand, it increases the subsidiary’s performance, as measured by ROA, by 12.5-to-15.4 basis points (bp) per annum (p.a.) (or 11.3%). On the other hand, it reduces the performance of other subsidiaries by 6.3-to-6.6 bp p.a. (or 5.2%). I also find that a new bank-to-bank route increases both subsidiaries’ performance by 6.4-to-7 bp p.a. (or 5.4%). The performance changes are not offset by changes in bank risk.