Do Multinational Banks Create or Destroy Economic Value?

Abstract

Multinational banks are a distinctive feature of today’s globalized economy, with some institutions now operating in more than 100 countries. Despite the thorough analyses of bank internationalization over the last decades, the literature has failed to provide clear evidence that cross-border expansion is a profitable process from a firm’s perspective. Following the long tradition of the analysis of the costs and benefits of focusing or diversifying the activities of a firm, in this paper we provide an answer to the question of whether bank cross-border diversification is value enhancing. In a large sample of more than 500 banks from 56 countries between 2001 and 2007, we find robust evidence of a statistically and economically significant diversification premium. Our results show that the benefits of scale and scope economies generated by multinational banks more than offset the typical agency costs of managing larger and more complex companies.

Keywords: Geographical Diversification, Corporate Diversification, Multinational Banking, Foreign Direct Investment

JEL Classification: G34, G21, G15, L22, F23, F36