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Do multinational banks create or destroy economic value?

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  • Gulamhussen, M. A.
  • Piheiro, Carlos
  • Pozzolo, Alberto Franco

Abstract

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 cross-border expansion is a profitable process from a firm’s perspective. The analyses of the costs and benefits of focusing or diversifying the activities of a firm have a long tradition in the economic and business literatures. The overall evidence is mixed, due to the opposite effects of scale and scope economies on one side and agency costs on the other. In this paper, we study the value of internationally diversified commercial banks. In our analysis we construct a measure of banks’ excess value using a large sample of more than 500 large banks from 56 countries between 2001 and 2007, and relate it to different measures of the international diversification of their activities. We find robust evidence of a statistically and economically significant diversification premium, suggesting that, in banking, the benefits of geographic scale and scope economies more than offset the agency costs.

Suggested Citation

  • Gulamhussen, M. A. & Piheiro, Carlos & Pozzolo, Alberto Franco, 2011. "Do multinational banks create or destroy economic value?," Economics & Statistics Discussion Papers esdp11057, University of Molise, Dept. EGSeI.
  • Handle: RePEc:mol:ecsdps:esdp11057
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    Cited by:

    1. Stefano Caiazza & Alberto Franco Pozzolo & Giovanni Trovato, 2014. "Do domestic and cross-border M&As differ? Cross-country evidence from the banking sector," Applied Financial Economics, Taylor & Francis Journals, vol. 24(14), pages 967-981, July.
    2. Mohamed Azzim Gulamhussen & Carlos Pinheiro & Alberto Franco Pozzolo, 2012. "Were Multinational Banks Taking Excessive Risks Before the Recent Financial Crisis?," Development Working Papers 332, Centro Studi Luca d'Agliano, University of Milano, revised 16 Jul 2012.
    3. Caiazza, Stefano & Clare, Andrew & Pozzolo, Alberto Franco, 2012. "What do bank acquirers want? Evidence from worldwide bank M&A targets," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2641-2659.
    4. 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.

    More about this item

    Keywords

    Geographical diversification; Corporate diversification; Multinational banking; Foreign Direct Investment;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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