Geographic Diversification and Firm Value in the Financial Services Industry

28 Pages Posted: 29 Aug 2008 Last revised: 15 Jun 2013

See all articles by Markus Schmid

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Ingo Walter

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

Date Written: October 18, 2009

Abstract

This paper investigates whether geographic diversification is value-enhancing or value-destroying in the financial services sector, broadly defined. Our dataset comprises approximately 3,579 observations over the period from 1985 to 2004 and covers the entire range of U.S. financial intermediaries – commercial banks, investment banks, insurance companies, asset managers, and financial infrastructure services firms. We use two alternative measures of geographic diversification: (1) a dummy variable whether the firm reports more than one geographic segment and (2) the percentage of sales from non-domestic operations. Our results indicate that geographic diversification is not associated with a significant valuation discount in financial intermediaries. However, when accounting for the firms’ main activity-areas, we find evidence of a significant discount associated with geographic diversification in securities firms and a premium in credit intermediaries and insurance companies. All these results are robust after taking into account functional diversification of the firms as well as a potential endogeneity of both functional and geographic diversification.

Keywords: Geographic diversification, Functional diversification, Organizational structure, Financial intermediaries, Firm valuation

JEL Classification: G20, G32, G34

Suggested Citation

Schmid, Markus and Walter, Ingo, Geographic Diversification and Firm Value in the Financial Services Industry (October 18, 2009). Available at SSRN: https://ssrn.com/abstract=1256642 or http://dx.doi.org/10.2139/ssrn.1256642

Markus Schmid (Contact Author)

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Ingo Walter

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0707 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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