Diversification Strategies and Investment Opportunities in the International Banking Industry

We examine whether and how banks’ diversification strategy responds to expected investment opportunities. We find evidence consistent with the view that whether banks diversify to develop internal funding capability in response to good prospects, or to search for new growth opportunities in response to poor prospects in the current activity, depends on external capital constraints. Moreover, although international diversification can facilitate activity diversification, the former is unlikely to substitute for the latter. We also find evidence suggesting that banks find it optimal to have immediate control over the internal fund allocation rather than relying on the allocation managed by their group parent. However, there is no evidence that activity diversification by banks reflects inefficient diversification.