Ownership Structure, Revenue Diversification and Insolvency Risk in European Banks

Abstract

In this paper the link between ownership structure, revenue diversification and insolvency risk is investigated. Using a panel dataset of 153 listed European banks over the period 2000-2007, and the three stage least squares (3SLS) estimation technique, we find that revenue diversification reduces insolvency risk in banks that have a large shareholder. This is because, the need for the majority shareholder to protect its wealth is often accomplished through its ability to influence strategic investment decisions positively. The results are robust to an array of controls including alternative methodology, sample and variable specifications. The results are also robust to controls for the regulatory environment that banks operate in. The link identified between ownership concentration and revenue diversification is a novel way of analyzing the impact of the latter on insolvency risk in banks.

Keywords: European banks, Revenue diversification, Corporate Governance, Ownership structure, Insolvency risk

JEL Classification: G21, G28, G32, G33