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Is There a Diversification Discount in Financial Conglomerates?

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  • Laeven, Luc
  • Levine, Ross

Abstract

This paper investigates whether the diversity of activities conducted by financial institutions influences their market valuations. We find that there is a diversification discount: The market values financial conglomerates that engage in multiple activities, e.g., lending and non-lending financial services, lower than if those financial conglomerates were broken into financial intermediaries that specialize in the individual activities. While difficult to identify a single causal factor, the results are consistent with theories that stress intensified agency problems in financial conglomerates that engage in multiple activities and indicate that economies of scope are not sufficiently large to produce a diversification premium.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5121.

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Date of creation: Jul 2005
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Handle: RePEc:cpr:ceprdp:5121

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Keywords: agency costs; banking; corporate diversification; economies of scope;

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