Do Financial Conglomerates Create or Destroy Economic Value?

53 Pages Posted: 13 Oct 2008

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

Multiple version iconThere are 2 versions of this paper

Date Written: September 2006

Abstract

This paper attempts to ascertain whether or not functional diversification is value-enhancing or value-destroying in the financial services sector. Based on a U.S. dataset comprising approximately 4060 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. We also investigate the geographic dimension of diversification as well as the interaction between geographic scope and functional diversification and find that the value-destruction associated with functional diversification is not apparent in geographic diversification. A further finding is that there is a significant premium for the very largest of our sample firms (with total assets above 100bn USD) indicating that there are "too big to fail" guarantees for very large financial conglomerates.

Keywords: Diversification, Focus, Organizational structure, Financial sector, Firm valuation

Suggested Citation

Schmid, Markus and Walter, Ingo, Do Financial Conglomerates Create or Destroy Economic Value? (September 2006). NYU Working Paper No. EC-06-28. Available at SSRN: https://ssrn.com/abstract=1281972

Markus Schmid

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 (Contact Author)

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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