Advanced Search
MyIDEAS: Login to save this paper or follow this series

Is There a Diversification Discount in Financial Conglomerates?

Contents:

Author Info

  • Luc Laeven
  • Ross Levine

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w11499.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11499.

as in new window
Length:
Date of creation: Aug 2005
Date of revision:
Publication status: published as Laeven, Luc & Levine, Ross, 2007. "Is there a diversification discount in financial conglomerates?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 331-367, August.
Handle: RePEc:nbr:nberwo:11499

Note: CF IFM
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Campa, Jose M. & Kedia, Simi, 2000. "Explaining the diversification discount," IESE Research Papers, IESE Business School D/424, IESE Business School.
  2. Penas, Maria Fabiana & Unal, Haluk, 2004. "Gains in bank mergers: Evidence from the bond markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(1), pages 149-179, October.
  3. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, American Finance Association, vol. 49(1), pages 3-37, March.
  4. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
  5. Debra J. Aron, 1988. "Ability, Moral Hazard, Firm Size, and Diversification," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 72-87, Spring.
  6. Allen, Linda & Rai, Anoop, 1996. "Operational efficiency in banking: An international comparison," Journal of Banking & Finance, Elsevier, Elsevier, vol. 20(4), pages 655-672, May.
  7. Allen N. Berger & David B. Humphrey, 1990. "The dominance of inefficiencies over scale and product mix economies in banking," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 107, Board of Governors of the Federal Reserve System (U.S.).
  8. Pulley, Lawrence B & Humphrey, David B, 1993. "The Role of Fixed Costs and Cost Complementarities in Determining Scope Economies and the Cost of Narrow Banking Proposals," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 66(3), pages 437-62, July.
  9. Allen N. Berger & Rebecca S. Demsetz & Philip E. Strahan, 1998. "The consolidation of the financial services industry: causes, consequences, and implications for the future," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-46, Board of Governors of the Federal Reserve System (U.S.).
  10. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, Econometric Society, vol. 47(1), pages 153-61, January.
  11. Gande, Amar & Puri, Manju & Saunders, Anthony, 1999. "Bank entry, competition, and the market for corporate securities underwriting," Journal of Financial Economics, Elsevier, Elsevier, vol. 54(2), pages 165-195, October.
  12. Beck, T.H.L. & Demirguc-Kunt , A. & Levine, R., 2006. "Bank supervision and corruption in lending," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-3125431, Tilburg University.
  13. Allen N. Berger & Gerald A. Hanweck & David B. Humphrey, 1986. "Competitive viability in banking: scale, scope, and product mix economies," Research Papers in Banking and Financial Economics, Board of Governors of the Federal Reserve System (U.S.) 82, Board of Governors of the Federal Reserve System (U.S.).
  14. Boyd, John H & Chang, Chun & Smith, Bruce D, 1998. "Moral Hazard under Commercial and Universal Banking," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(3), pages 426-68, August.
  15. Simon H. Kwan & Mark J. Flannery & M. Nimalendran, 1999. "Market evidence on the opaqueness of banking firms' assets," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 99-11, Federal Reserve Bank of San Francisco.
  16. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(6), pages 1155-77, December.
  17. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1989. "Do Managerial Objectives Drive Bad Acquisitions?," NBER Working Papers 3000, National Bureau of Economic Research, Inc.
  18. George J. Benston, 1994. "Universal Banking," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 8(3), pages 121-143, Summer.
  19. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 26(2), pages 301-25, June.
  20. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, Elsevier, vol. 37(1), pages 39-65, January.
  21. Owen Lamont & Christopher Polk, 1999. "The Diversification Discount: Cash Flows vs. Returns," NBER Working Papers 7396, National Bureau of Economic Research, Inc.
  22. Joseph G. Haubrich & João A. C. Santos, 1999. "Banking and commerce: a liquidity approach," Working Paper, Federal Reserve Bank of Cleveland 9907, Federal Reserve Bank of Cleveland.
  23. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(2), pages 221-248, April.
  24. John R. Graham & Michael L. Lemmon & Jack G. Wolf, 2002. "Does Corporate Diversification Destroy Value?," Journal of Finance, American Finance Association, American Finance Association, vol. 57(2), pages 695-720, 04.
  25. Raghuram Rajan & Henri Servaes & Luigi Zingales, 2000. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," Journal of Finance, American Finance Association, American Finance Association, vol. 55(1), pages 35-80, 02.
  26. Gande, Amar, et al, 1997. "Bank Underwriting of Debt Securities: Modern Evidence," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(4), pages 1175-1202.
  27. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, Elsevier, vol. 26(1), pages 3-27, July.
  28. Gordon M Phillips & Vojislav Maksimovic, 1999. "Do Conglomerate Firms Allocate Resources Inefficiently?," Working Papers, Center for Economic Studies, U.S. Census Bureau 99-11, Center for Economic Studies, U.S. Census Bureau.
  29. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  30. Houston, Joel & James, Christopher & Marcus, David, 1997. "Capital market frictions and the role of internal capital markets in banking," Journal of Financial Economics, Elsevier, Elsevier, vol. 46(2), pages 135-164, November.
  31. Servaes, Henri, 1996. " The Value of Diversification during the Conglomerate Merger Wave," Journal of Finance, American Finance Association, American Finance Association, vol. 51(4), pages 1201-25, September.
  32. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 57(5), pages 1891-1921, October.
  33. Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-86.
  34. Asli Demirguc-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1751, Econometric Society.
  35. Comment, Robert & Jarrell, Gregg A., 1995. "Corporate focus and stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 37(1), pages 67-87, January.
  36. Saunders, Anthony & Walter, Ingo, 1994. "Universal Banking in the United States: What Could We Gain? What Could We Lose?," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195080698, October.
  37. Vojislav Maksimovic & Gordon Phillips, 2002. "Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 57(2), pages 721-767, 04.
  38. Asli Demirgüç-Kunt & Luc Laeven & Ross Levine, 2004. "Regulations, market structure, institutions, and the cost of financial intermediation," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 593-626.
  39. Antoinette Schoar, 2002. "Effects of Corporate Diversification on Productivity," Journal of Finance, American Finance Association, American Finance Association, vol. 57(6), pages 2379-2403, December.
  40. Belén Villalonga, 2004. "Does Diversification Cause the "Diversification Discount"?," Financial Management, Financial Management Association, Financial Management Association, vol. 33(2), Summer.
  41. Denis, David J & Denis, Diane K & Sarin, Atulya, 1997. " Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 135-60, March.
  42. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
  43. Puri, Manju, 1996. "Commercial banks in investment banking Conflict of interest or certification role?," Journal of Financial Economics, Elsevier, Elsevier, vol. 40(3), pages 373-401, March.
  44. Gerard Caprio & Luc Laeven & Ross Levine, 2003. "Governance and Bank Valuation," NBER Working Papers 10158, National Bureau of Economic Research, Inc.
  45. Larry H.P. Lang & Rene M. Stulz, 1993. "Tobin's Q, Corporate Diversification and Firm Performance," NBER Working Papers 4376, National Bureau of Economic Research, Inc.
  46. Rotemberg, Julio J & Saloner, Garth, 1994. "Benefits of Narrow Business Strategies," American Economic Review, American Economic Association, American Economic Association, vol. 84(5), pages 1330-49, December.
  47. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of financial institutions: international survey and directions for future research," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1997-11, Board of Governors of the Federal Reserve System (U.S.).
  48. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  49. Ber, Hedva & Yafeh, Yishay & Yosha, Oved, 2001. "Conflict of interest in universal banking: Bank lending, stock underwriting, and fund management," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(1), pages 189-218, February.
  50. DeLong, Gayle L., 2001. "Stockholder gains from focusing versus diversifying bank mergers," Journal of Financial Economics, Elsevier, Elsevier, vol. 59(2), pages 221-252, February.
  51. Steven Drucker & Manju Puri, 2005. "On the Benefits of Concurrent Lending and Underwriting," Journal of Finance, American Finance Association, American Finance Association, vol. 60(6), pages 2763-2799, December.
  52. Belén Villalonga, 2004. "Diversification Discount or Premium? New Evidence from the Business Information Tracking Series," Journal of Finance, American Finance Association, American Finance Association, vol. 59(2), pages 479-506, 04.
  53. Gertner, Robert H & Scharfstein, David S & Stein, Jeremy C, 1994. "Internal versus External Capital Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(4), pages 1211-30, November.
  54. Carola Schenone, 2004. "The Effect of Banking Relationships on the Firm's IPO Underpricing," Journal of Finance, American Finance Association, American Finance Association, vol. 59(6), pages 2903-2958, December.
  55. Yaron Brook & Robert Hendershott & Darrell Lee, 1998. "The Gains from Takeover Deregulation: Evidence from the End of Interstate Banking Restrictions," Journal of Finance, American Finance Association, American Finance Association, vol. 53(6), pages 2185-2204, December.
  56. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, American Economic Association, vol. 92(4), pages 874-888, September.
  57. Asli Demirgüç-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability?," IMF Working Papers, International Monetary Fund 00/3, International Monetary Fund.
  58. Fluck, Zsuzsanna & Lynch, Anthony W, 1999. "Why Do Firms Merge and Then Divest? A Theory of Financial Synergy," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 72(3), pages 319-46, July.
  59. Owen A. Lamont, 2001. "The Diversification Discount: Cash Flows Versus Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 56(5), pages 1693-1721, October.
  60. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(4), pages 689-721, August.
  61. Houston, Joel F. & James, Christopher M. & Ryngaert, Michael D., 2001. "Where do merger gains come from? Bank mergers from the perspective of insiders and outsiders," Journal of Financial Economics, Elsevier, Elsevier, vol. 60(2-3), pages 285-331, May.
  62. Ferrier, Gary D. & Grosskopf, Shawna & Hayes, Kathy J. & Yaisawarng, Suthathip, 1993. "Economies of diversification in the banking industry : A frontier approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(2), pages 229-249, April.
  63. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  64. Karl Lins & Henri Servaes, 1999. "International Evidence on the Value of Corporate Diversification," Journal of Finance, American Finance Association, American Finance Association, vol. 54(6), pages 2215-2239, December.
  65. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1367-400, September.
  66. Barth, James R. & Caprio Jr, Gerard & Levine, Ross, 2001. "The regulation and supervision of banks around the world - a new database," Policy Research Working Paper Series, The World Bank 2588, The World Bank.
  67. Vander Vennet, Rudi, 2002. "Cost and Profit Efficiency of Financial Conglomerates and Universal Banks in Europe," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 34(1), pages 254-82, February.
  68. Renee Adams & Hamid Mehran, 2003. "Is corporate governance different for bank holding companies?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Apr, pages 123-142.
  69. John, Kose & Ofek, Eli, 1995. "Asset sales and increase in focus," Journal of Financial Economics, Elsevier, Elsevier, vol. 37(1), pages 105-126, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11499. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.