Organizational Structure and the Diversification Discount: Evidence from Commercial Banking
44 Pages Posted: 11 May 2005 Last revised: 7 Aug 2008
Date Written: August 6, 2008
This paper provides evidence on organizational structure, geographic diversification, and performance at bank holding companies (BHCs). First, we show that a BHC's member banks benefit from access to the parent organization's internal capital market. Second, we ask if the benefits of internal capital markets are best realized within loosely structured, decentralized organizations or more consolidated, centralized firms. We find that BHCs with many subsidiaries are less profitable and have lower q ratios than similar BHCs with fewer subsidiaries. However, because we study multi-unit firms in a single industry, our results suggest that the valuation discount reported in the diversification literature in empirical corporate finance reflects not only industry diversification, but also organizational structure.
Keywords: Diversification, Organizational Structure, Bank Holding Companies, Internal Capital Markets, Diversification Discount
JEL Classification: L22, G21
Suggested Citation: Suggested Citation