Is There a Diversification Discount in Financial Conglomerates?
European Central Bank (ECB); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF)
UC Berkeley; Milken Institute; National Bureau of Economic Research (NBER)
NBER Working Paper No. w11499
This paper investigates whether the diversity of activities conducted by financial institutionsinfluences their market valuations. We find that there is a diversification discount: The marketvalues financial conglomerates that engage in multiple activities, e.g., lending and non-lendingfinancial services, lower than if those financial conglomerates were broken into financialintermediaries that specialize in the individual activities. While difficult to identify a single causalfactor, the results are consistent with theories that stress intensified agency problems infinancial conglomerates that engage in multiple activities and indicate that economies of scope arenot sufficiently large to produce a diversification premium.
Number of Pages in PDF File: 59
Date posted: September 1, 2005
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