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How does the stock market value bank diversification? Empirical evidence from Japanese banks

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  • Sawada, Michiru

Abstract

This paper empirically examines the effect of banks' revenue diversification across different activities on the stock-based return and risk measures using data on the Japanese banking sector. In our analyses, we use non-interest income share as a measure for revenue diversification. These analyses indicate that revenue diversification positively affects bank market value but provide no evidence that it reduce bank risks. By contrast, when non-interest income is divided into its constituent parts—fee income, trading income, and other non-interest income—we find that a shift towards fee income-generating business decreases all types of risks (systematic risk, idiosyncratic risk, and total risk). Furthermore, we find that revenue diversification affects bank value and risk differently depending on particular bank characteristics, such as organizational form and traditional banking business performance.

Suggested Citation

  • Sawada, Michiru, 2013. "How does the stock market value bank diversification? Empirical evidence from Japanese banks," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 40-61.
  • Handle: RePEc:eee:pacfin:v:25:y:2013:i:c:p:40-61
    DOI: 10.1016/j.pacfin.2013.08.001
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    References listed on IDEAS

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    Cited by:

    1. Baselga-Pascual, Laura & Trujillo-Ponce, Antonio & Cardone-Riportella, Clara, 2015. "Factors influencing bank risk in Europe: Evidence from the financial crisis," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 138-166.
    2. repec:eee:reveco:v:55:y:2018:i:c:p:203-219 is not listed on IDEAS
    3. Piyadasa Edirisuriya & Abeyratna Gunasekarage & Michael Dempsey, 2015. "Australian Specific Bank Features and the Impact of Income Diversification on Bank Performance and Risk," Australian Economic Papers, Wiley Blackwell, vol. 54(2), pages 63-87, June.
    4. Carl R. Chen & Ying Sophie Huang & Ting Zhang, 2017. "Non-interest Income, Trading, and Bank Risk," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(1), pages 19-53, February.
    5. repec:eee:finlet:v:22:y:2017:i:c:p:101-104 is not listed on IDEAS
    6. Jouida, Sameh & Bouzgarrou, Houssam & Hellara, Slaheddine, 2017. "The effects of activity and geographic diversification on performance: Evidence from French financial institutions," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 920-939.

    More about this item

    Keywords

    Revenue diversification; Bank stock return; Bank risk;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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