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Strategies in financial services, the shareholders and the system : is bigger and broader better?

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  • Walter, Ingo
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    Abstract

    The financial services industry is ?special? in a variety of ways, including the fiduciary nature of the business, its role at the center of the payments and capital allocation process with all its static and dynamic implications for economic performance, and the systemic nature of problems that can arise in the industry. So the structure, conduct and performance of the industry has unusually important public interest dimensions. One facet of the discussion has focused on size of financial firms, however measured, and the range of activities conducted by them Is size positively related to total returns to shareholders? If so, does this involve gains in efficiency or transfers of wealth to shareholders from other constituencies, or maybe both? Does greater breadth generate sufficient information-cost and transaction-cost economies to be beneficial to shareholders and customers, or can it work against their interests in ways that may ultimately impede shareholder value as well? And is bigger and broader also safer? This paper starts with a simple strategic framework for thinking about these issues from the perspective of the management of financial firms. What should they be trying to do, and how does this relate to the issues of size and breadth? It then reviews the available evidence and reaches a set of tentative conclusions from what we know so far, both from a shareholder perspective and that of the financial system as a whole. --

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    Bibliographic Info

    Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 205.

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    Date of creation: 2002
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    Handle: RePEc:zbw:hwwadp:26341

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    Keywords: financial services; shareholders; size of financial firms;

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    1. Edward J. Kane, 2000. "Incentives for banking megamergers: what motives might regulators infer from event-study evidence?," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 671-705.
    2. 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.
    3. Houston, Joel F. & Ryngaert, Michael D., 1994. "The overall gains from large bank mergers," Journal of Banking & Finance, Elsevier, Elsevier, vol. 18(6), pages 1155-1176, December.
    4. John, Kose & Ofek, Eli, 1995. "Asset sales and increase in focus," Journal of Financial Economics, Elsevier, Elsevier, vol. 37(1), pages 105-126, January.
    5. O'Hara, Maureen & Shaw, Wayne, 1990. " Deposit Insurance and Wealth Effects: The Value of Being "Too Big to Fail."," Journal of Finance, American Finance Association, American Finance Association, vol. 45(5), pages 1587-1600, December.
    6. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(1), pages 3-31, March.
    7. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, 1997. "The effects of megamergers on efficiency and prices: evidence from a bank profit function," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1997-9, Board of Governors of the Federal Reserve System (U.S.).
    8. Berger, Allen N. & Hancock, Diana & Humphrey, David B., 1993. "Bank efficiency derived from the profit function," Journal of Banking & Finance, Elsevier, Elsevier, vol. 17(2-3), pages 317-347, April.
    9. Boyd, John H. & Graham, Stanley L. & Hewitt, R. Shawn, 1993. "Bank holding company mergers with nonbank financial firms: Effects on the risk of failure," Journal of Banking & Finance, Elsevier, Elsevier, vol. 17(1), pages 43-63, February.
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