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Do Financial Conglomerates Create or Destroy Economic Value?
Markus M. Schmid University of St. Gallen - Swiss Institute of Banking and Finance Ingo Walter New York University - Stern School of Business July 15, 2008 EFA 2007 Ljubljana Meetings Paper Abstract: This paper investigates whether functional diversification is value-enhancing or value-destroying in the financial services sector, broadly defined. Based on a U.S. dataset comprising approximately 4,060 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. In addition, the discount applies to all financial services activity-areas with the exception of investment banking and is stable over different combinations of financial activity-areas with the exception of commercial banking units combined with insurance companies and/or investment banking activities.
Keywords: Diversification, Banking, Organizational structure, Financial sector, Firm valuation JEL Classifications: G20, G32, G34 Working Paper SeriesDate posted: September 10, 2006 ; Last revised: August 26, 2008Suggested CitationContact Information
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