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Does one bank size fit all? The role of diversification and monitoring

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Listed:
  • Avramidis, Panagiotis

    (ALBA Graduate Business School at The American College of Greece)

  • Cabolis, Christos

    (IMD and ALBA Graduate Business School at The American College of Greece)

  • Serfes, Konstantinos

    (School of Economics Drexel University)

Abstract

Using a sample of US bank holding companies from 2001 to 2012, we provide evidence that the relationship between size and bank charter value is an inverse U-shape, which implies the existence of an optimal size. More importantly, motivated by Diamond’s (1984) theoretical model of financial intermediation as delegated monitors, we provide evidence that the inverse U-shape relationship, and consequently the optimal size, is determined by the tradeoff between the diversification benefits and monitoring costs, that is, the direct monitoring cost of bank assets and the delegation costs for debtholders and shareholders.

Suggested Citation

  • Avramidis, Panagiotis & Cabolis, Christos & Serfes, Konstantinos, 2016. "Does one bank size fit all? The role of diversification and monitoring," School of Economics Working Paper Series 2016-7, LeBow College of Business, Drexel University, revised 17 Oct 2016.
    • Handle: RePEc:ris:drxlwp:2016_007
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    Cited by:

    1. Delis, Manthos & Iosifidi, Maria & Tsionas, Mike G, 2017. "Endogenous bank risk and efficiency," European Journal of Operational Research, Elsevier, vol. 260(1), pages 376-387.

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    More about this item

    Keywords

    Bank Size; Charter Value; Diversification; Monitoring;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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