Direct measures of market power in line with the New Empirical Industrial Organization (NEIO) include the Lerner index (Lerner, 1934) and the Boone indicator (Boone, 2008). The Lerner index is defined as the difference between output prices and marginal costs (relative to prices). Prices are calculated as total bank revenue over assets, whereas marginal costs are obtained from an estimated translog cost function with respect to output (see Demirgüç‐Kunt and Martínez Pería, 2010). Higher values of the Lerner index indicate less bank competition. The Boone indicator is estimated as the elasticity of profits to marginal costs. To obtain the elasticity, the log of profits (measured by return on assets) is regressed on the log of marginal costs. The estimated coefficient, computed from the first derivative of a trans‐log cost function, is the elasticity. The rationale behind the indicator is that higher profits are achieved by more‐efficient banks. Hence, the more negative the Boone indicator, the higher the degree of competition is because the effect of reallocation is stronger (see Schaeck and Cihák, 2012). Bank concentration ratios, the Lerner index and the Boone indicator all are from World Bank Global Financial Development Database. Finally, we employ a set of proxies for bank competition policy in order to test their effect on economic growth of financially dependent firms (see section 5 for a description and sources).

Table 1 reports some descriptive statistics (number of observations, average value, standard deviation, minimum and maximum observed values) for all the variables included in our baseline empirical specification. The variables included are: value added (valaddw1), the share of value added (valadd_share), financial dependence as measured by Rajan and Zingales (extdepRZ1), Klapper et al. (extdepKLR), Fernandez de Guevara and Maudos (extdepGM), credit‐to‐GDP (credit_GDP), the 5‐bank concentration ratio (conc5), the 3‐bank concentration ratio (conc3), the Boone indicator (boone) and the Lerner index (lerner). Table 2 reports the correlation matrix for these variables and for all measures of bank competition included in our data set.

# **3. Empirical methodology**

To study the real effects of bank competition in the GCC economies, we test whether industries that are more dependent on external finance experience lower growth performance when the degree of competition in the banking sector is relatively low. In the baseline specification, we use as dependent variable the growth rate of real value added of industry _j_ in country _i_ at time _t_ , denoted by _yi,j,t_ . Such measure of sectoral growth is regressed against the explanatory variable whose effect we are interested in isolating, i.e. an interaction term equal to the product of external finance dependence of sector _j_ in country _i_ (as measured by Rajan and Zingales, 1998) and country _i_ ’s level of bank competition at time _t_ . We also include as regressor an interaction term equal to sector _j_ ’s external finance dependence and the level of financial development of country _i_ at time _t_ (as measured by the credit‐to‐GDP ratio), in order to capture the potential effects that the country’s financial development might have on growth at industry level, conditional on the level of external dependence. In addition to the two interaction terms, following, among others, Rajan and Zingales (1998) and Dell’Ariccia et al. (2008), we also include the share of value added of sector _j_ in country _i_ at time _t‐1_ to keep into account convergence effects, in line with theoretical predictions from standard growth models. To account for the presence of cross‐sectional and time‐varying unobservables, three sets of fixed effects (industry‐ 6