Do multinational banks create or destroy economic value?

Multinational banks are a distinctive feature of today's globalized economy, with some institutions now operating in more than 100 countries. Despite the thorough analyses of bank internationalization over the last decades, the literature has failed to provide clear evidence that crossborder expansion is a profitable process from a firm's perspective. Following the long tradition of the analyses of the costs and benefits of focusing or diversifying the activities of a firm, in this paper we provide an answer to the question of whether bank cross-border diversification is value enhancing, comparing the value of internationally diversified commercial banks with that of more domestically focused intermediaries. Adapting the methodology of Laeven and Levine (2007), we measure a bank's excess value as the difference between its Tobin's q and the benchmark of multinational banks, and relate it to the degree of international diversification of its activities. In a large sample of more than 500 banks from 56 countries between 2001 and 2007, we find evidence of a statistically and economically significant diversification premium, that is robust to the use of different definitions of diversification, to the possible effects of outliers, and to controlling for potential endogeneity problems. Our results shown that the benefits of scale and scope economies generated by multinational banks more than offset the typical agency costs of managing larger and more complex companies, thus providing a strong rationale for the rapid growth in banks' international activities during the last couple of decades.