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Organizational Structure And The Diversification Discount: Evidence From Commercial Banking

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  • PETER G. KLEIN
  • MARC R. SAIDENBERG

Abstract

We provide evidence on organizational structure and performance at bank holding companies (BHC's). First, we show that a BHC's member banks benefit from access to internal capital markets. Second, we ask if these benefits are best realized within loosely structured, decentralized organizations or more consolidated, centralized firms. We find that BHC's with many subsidiaries are less profitable and have lower q ratios than similar BHC's with fewer subsidiaries. However, because we study multi‐unit firms in a single industry, our results suggest that the diversification discount reported in the corporate finance literature reflects not only industry diversification, but also organizational structure.

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  • Peter G. Klein & Marc R. Saidenberg, 2010. "Organizational Structure And The Diversification Discount: Evidence From Commercial Banking," Journal of Industrial Economics, Wiley Blackwell, vol. 58(1), pages 127-155, March.
    • Handle: RePEc:bla:jindec:v:58:y:2010:i:1:p:127-155
    DOI: 10.1111/j.1467-6451.2010.00409.x
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    6. Duong Thuy Phan & Trong Tai Nguyen & Thi Thanh Hoang, 2022. "Impact of income diversification on the business performance of Vietnamese commercial banks," Cogent Business & Management, Taylor & Francis Journals, vol. 9(1), pages 2132592-213, December.
    7. 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.
    8. Liu, Frank Hong & Norden, Lars & Spargoli, Fabrizio, 2020. "Does uniqueness in banking matter?," Journal of Banking & Finance, Elsevier, vol. 120(C).
    9. K. S. Manikandan & J. Ramachandran, 2015. "Beyond institutional voids: Business groups, incomplete markets, and organizational form," Strategic Management Journal, Wiley Blackwell, vol. 36(4), pages 598-617, April.
    10. Mostak Ahamed, M., 2017. "Asset quality, non-interest income, and bank profitability: Evidence from Indian banks," Economic Modelling, Elsevier, vol. 63(C), pages 1-14.
    11. Teresa A. Dickler & Timothy B. Folta, 2020. "Identifying internal markets for resource redeployment," Strategic Management Journal, Wiley Blackwell, vol. 41(13), pages 2341-2371, December.
    12. Tatsuo Ushijima, 2016. "Diversification, Organization, and Value of the Firm," Financial Management, Financial Management Association International, vol. 45(2), pages 467-499, May.
    13. Joseph P. Hughes & Loretta J. Mester, 2018. "The Performance of Financial Institutions: Modeling, Evidence, and Some Policy Implications," Departmental Working Papers 201805, Rutgers University, Department of Economics.
    14. Haykel Zouaoui & Faten Zoghlami, 2023. "What do we know about the impact of income diversification on bank performance? A systematic literature review," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(3), pages 286-309, September.
    15. Dombret Andreas & Liebig Thilo & Stein Ingrid, 2014. "Trennbankensystem – ein Weg zu mehr Finanzstabilität in Deutschland?," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 15(1), pages 41-55, February.
    16. Gulamhussen, M.A. & Pinheiro, Carlos & Pozzolo, Alberto Franco, 2014. "International diversification and risk of multinational banks: Evidence from the pre-crisis period," Journal of Financial Stability, Elsevier, vol. 13(C), pages 30-43.
    17. Rayenda Brahmana & Maria Kontesa & Rachel Elfra Gilbert, 2018. "Income diversification and bank performance: evidence from malaysian banks," Economics Bulletin, AccessEcon, vol. 38(2), pages 799-809.
    18. Angus Armstrong & Tatiana Fic, 2014. "Bank Diversification and Valuation: International Evidence," National Institute of Economic and Social Research (NIESR) Discussion Papers 438, National Institute of Economic and Social Research.
    19. Bressan, Silvia & Weissensteiner, Alex, 2021. "The financial conglomerate discount: Insights from stock return skewness," International Review of Financial Analysis, Elsevier, vol. 74(C).
    20. Löffler, Clemens & Pfeiffer, Thomas, 2013. "Centralized versus Decentralized External Financing, Winner Picking and Corporate Socialism," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79902, Verein für Socialpolitik / German Economic Association.
    21. Guerry, Nicolas & Wallmeier, Martin, 2017. "Valuation of diversified banks: New evidence," Journal of Banking & Finance, Elsevier, vol. 80(C), pages 203-214.

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