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Is There a Diversification Discount in Financial Conglomerates?


Luc Laeven


International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Ross Levine


UC Berkeley; Milken Institute; National Bureau of Economic Research (NBER)

August 2005

NBER Working Paper No. w11499

Abstract:     
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

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Date posted: September 1, 2005  

Suggested Citation

Laeven, Luc and Levine, Ross, Is There a Diversification Discount in Financial Conglomerates? (August 2005). NBER Working Paper No. w11499. Available at SSRN: http://ssrn.com/abstract=775989

Contact Information

Luc A. Laeven
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
202-6239020 (Phone)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Ross Levine (Contact Author)
UC Berkeley ( email )
545 Student Services Building
Berkeley, CA 94720
United States
Milken Institute ( email )
1250 Fourth Street
Santa Monica, CA 90401
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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