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Valuation of diversified banks: New evidence

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  • Guerry, Nicolas
  • Wallmeier, Martin

Abstract

This paper reconsiders the effect of diversification on bank valuation. Our objective is to provide new evidence based on a unified estimation framework that places particular emphasis on separating the effects of diversification (specialised banks vs. diversified banks) from those of bank type (investment banks vs. commercial banks). Consistent with prior studies, we find a significant diversification discount at the end of the 1990s. Our main finding is that it decreases over time and practically vanishes after the financial crisis. We do not find support for the hypothesis that the diversification effect is influenced by geographical or regulatory factors. The valuation impact of bank characteristics varies over time, particularly in the financial crisis, but this structural break does not explain the observed decrease of the diversification discount. We show that the pre-crisis discount is considerably smaller in a robust regression, which in part is driven by banks with a large share of non-interest income.

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  • Guerry, Nicolas & Wallmeier, Martin, 2017. "Valuation of diversified banks: New evidence," Journal of Banking & Finance, Elsevier, vol. 80(C), pages 203-214.
    • Handle: RePEc:eee:jbfina:v:80:y:2017:i:c:p:203-214
    DOI: 10.1016/j.jbankfin.2017.04.004
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    More about this item

    Keywords

    Banking; Firm valuation; Diversification; Conglomerate discount; Universal banking; Economies of scope; Agency costs;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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