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Do Financial Conglomerates Create or Destroy Economic Value?Markus M. SchmidUniversity of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - SoF: School of Finance Ingo WalterNew York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance September 2006 NYU Working Paper No. 2451/26090 Abstract: This paper attempts to ascertain whether or not functional diversification is value-enhancing or value-destroying in the financial services sector. Based on a U.S. dataset comprising approximately 4060 observations covering the period 1985-2004, we report a substantial and persistent conglomerate discount among financial intermediaries. Our results suggest that it is diversification that causes the discount, and not that troubled firms diversify into other more promising areas. We also investigate the geographic dimension of diversification as well as the interaction between geographic scope and functional diversification and find that the value-destruction associated with functional diversification is not apparent in geographic diversification. A further finding is that there is a significant premium for the very largest of our sample firms (with total assets above 100bn USD) indicating that there are "too big to fail" guarantees for very large financial conglomerates.
Number of Pages in PDF File: 53 Keywords: Diversification, Focus, Organizational structure, Financial sector, Firm valuation working papers seriesDate posted: October 13, 2008Suggested CitationContact Information
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