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Do financial conglomerates create or destroy value? Evidence for the EU

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  • Lelyveld, Iman van
  • Knot, Klaas

    (Groningen University)

Abstract

There is an ongoing debate about whether firm focus creates or destroys shareholder value. Earlier literature has shown significant diversification discounts: firms that engage in multiple activities are valued lower. Various factors are important in determining the size of the discount, for example cross-subsidization and agency problems. The existing literature, however, generally focuses on non-financial firms or on banks combining investment and commercial banking. Our paper focuses specifically on the valuation of bank-insurance conglomerates. We find no universal diversification discount but significant variability. The discount is explained by the size (increasing), the familiarity with the conglomerate business model (decreasing) and the risk profile (decreasing). Our results are robust to the historical origin, the merger record and the age of the conglomerate, as well as peer group specification and outlier elimination.

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Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 08003.

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Date of creation: 2008
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Handle: RePEc:dgr:rugsom:08003

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Citations

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Cited by:
  1. Elahi, M.A., 2011. "Essays on financial fragility," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4578460, Tilburg University.
  2. Leonardo Gambacorta & Adrian van Rixtel, 2013. "Structural bank regulation initiatives: approaches and implications," BANCARIA, Bancaria Editrice, Bancaria Editrice, vol. 6, pages 14-27, June.
  3. Paul Cavelaars & Joost Passenier, 2012. "Follow the money: what does the literature on banking tell prudential supervisors on bank business models?," DNB Working Papers, Netherlands Central Bank, Research Department 336, Netherlands Central Bank, Research Department.
  4. Stefan Erdorf & Thomas Hartmann-Wendels & Nicolas Heinrichs & Michael Matz, 2013. "Corporate diversification and firm value: a survey of recent literature," Financial Markets and Portfolio Management, Springer, Springer, vol. 27(2), pages 187-215, June.
  5. Degryse, Hans & Elahi, Muhammad Ather & Penas, María Fabiana, 2013. "Determinants of banking system fragility: a regional perspective," Working Paper Series, European Central Bank 1567, European Central Bank.
  6. Bengtsson, E., 2013. "Fund Management and Systemic Risk - Lessons from the Global Financial Crisis," CITYPERC Working Paper Series 2013-06, Department of International Politics, City University London.
  7. Slijkerman, Jan Frederik & Schoenmaker, Dirk & de Vries, Casper G., 2013. "Systemic risk and diversification across European banks and insurers," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 773-785.
  8. Beltratti, Andrea & Paladino, Giovanna, 2013. "Is M&A different during a crisis? Evidence from the European banking sector," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5394-5405.
  9. Bourjade, Sylvain & Schindele, Ibolya, 2011. "The role of agency costs in financial conglomeration," MPRA Paper 34815, University Library of Munich, Germany.
  10. Gulamhussen, M. A. & Piheiro, Carlos & Pozzolo, Alberto Franco, 2011. "Do multinational banks create or destroy economic value?," Economics & Statistics Discussion Papers esdp11057, University of Molise, Dept. EGSeI.
  11. Grass, Gunnar, 2010. "The impact of conglomeration on the option value of equity," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3010-3024, December.
  12. Beltratti, Andrea & Paladino, Giovanna, 2011. "Is M&A different during a crisis? Evidence from the European banking sector," MPRA Paper 35065, University Library of Munich, Germany.
  13. Elsas, Ralf & Hackethal, Andreas & Holzhäuser, Markus, 2010. "The anatomy of bank diversification," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1274-1287, June.
  14. Filson, Darren & Olfati, Saman, 2014. "The impacts of Gramm–Leach–Bliley bank diversification on value and risk," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 209-221.
  15. Vallascas, Francesco & Hagendorff, Jens, 2011. "The impact of European bank mergers on bidder default risk," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 902-915, April.
  16. Robert DeYoung & Douglas Evanoff & Philip Molyneux, 2009. "Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature," Journal of Financial Services Research, Springer, Springer, vol. 36(2), pages 87-110, December.

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