Diversification and Internal Information Sharing: Evidence from Financial Conglomerates

60 Pages Posted: 16 Mar 2011

See all articles by Jiaren Pang

Jiaren Pang

Tsinghua University - School of Economics & Management

Paul A. Spindt

Tulane University - A.B. Freeman School of Business

Sheri Tice

Tulane University - A.B. Freeman School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 17, 2010

Abstract

A potential benefit of corporate diversification is internal information sharing among related business units which may mitigate information frictions and improve firm performance. We identify this benefit by examining the effect of diversification on bank valuation across countries with different external information reporting environments. If diversification enhances value through internal information sharing, the benefits should be larger in countries with less external information sharing or more information asymmetry. Using an international sample of banks, we find strong evidence supporting this hypothesis. Moreover, internal information sharing is more valuable for diversified banks with a large proportion of commercial banking (investment banking) activities when negative (positive) credit information is unavailable from external sources. We also find that internal information sharing reduces bank risk more when there is less external information sharing. Lastly, as would be predicted in equilibrium, banks are less diversified in countries with more developed credit reporting systems, since internal information sharing is less valuable in such countries.

Keywords: Diversification, Information Sharing, Credit Bureaus

JEL Classification: G21, G24, F23

Suggested Citation

Pang, Jiaren and Spindt, Paul A. and Tice, Sheri, Diversification and Internal Information Sharing: Evidence from Financial Conglomerates (December 17, 2010). Available at SSRN: https://ssrn.com/abstract=1786065 or http://dx.doi.org/10.2139/ssrn.1786065

Jiaren Pang

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Paul A. Spindt

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5413 (Phone)

Sheri Tice (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5469 (Phone)
504-865-6751 (Fax)

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