Geographic Diversification and Firm Value in the Financial Services Industry

Abstract

This paper investigates whether geographic diversification is value-enhancing or value-destroying in the financial services sector, broadly defined. Our dataset comprises approximately 3,579 observations over the period from 1985 to 2004 and covers the entire range of U.S. financial intermediaries – commercial banks, investment banks, insurance companies, asset managers, and financial infrastructure services firms. We use two alternative measures of geographic diversification: (1) a dummy variable whether the firm reports more than one geographic segment and (2) the percentage of sales from non-domestic operations. Our results indicate that geographic diversification is not associated with a significant valuation discount in financial intermediaries. However, when accounting for the firms’ main activity-areas, we find evidence of a significant discount associated with geographic diversification in securities firms and a premium in credit intermediaries and insurance companies. All these results are robust after taking into account functional diversification of the firms as well as a potential endogeneity of both functional and geographic diversification.

Keywords: Geographic diversification, Functional diversification, Organizational structure, Financial intermediaries, Firm valuation

JEL Classification: G20, G32, G34