Bank Holding Company Diversification and Production Efficiency

Posted: 18 Jun 2014

See all articles by Elyas Elyasiani

Elyas Elyasiani

Temple University - Department of Finance

Yong Wang

Western New England University - Department of Accounting and Finance

Date Written: 2012

Abstract

Bank Holding Companies (BHCs) have been diversifying their businesses increasingly among banking, securities and insurance activities in the recent decades through establishment of Section 20 subsidiaries in earlier years and through formation of financial holding companies after the Gramm–Leach–Bliley Act (GLBA, 1999). This study examines whether BHC diversification is associated with improvement or detriment in its production efficiency. We apply the Data Envelopment Analysis (DEA) to calculate the Malmquist index of productivity, and the total factor productivity change for a sample of BHCs over the period 1997–2007. Two main results are obtained. First, technical efficiency is negatively associated with activity diversification and the effect is primarily driven by BHCs that did not experience diversification through Section 20 subsidiaries. Second, the degree of change in diversification over time is not associated with total factor productivity change but it is negatively associated with technical efficiency change. This latter relationship is also primarily exhibited for BHCs that did not establish Section 20 subsidiaries. It can be concluded that diversification is, on average, associated with lower production efficiency of BHCs, especially for those BHCs without first–mover advantage obtained through Section 20 subsidiaries. This is consistent with findings on diversification discount in the finance literature.

Keywords: bank, diversification, DEA, efficiency

JEL Classification: G21, G20, G18, G24

Suggested Citation

Elyasiani, Elyas and Wang, Yong, Bank Holding Company Diversification and Production Efficiency (2012). Applied Financial Economics, Vol. 22, 2012, 1409–1428; Fox School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2451286

Elyas Elyasiani (Contact Author)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-5881 (Phone)
215-204-5698 (Fax)

Yong Wang

Western New England University - Department of Accounting and Finance ( email )

United States

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