Organizational Structure and the Diversification Discount: Evidence from Commercial Banking

44 Pages Posted: 11 May 2005 Last revised: 7 Aug 2008

See all articles by Peter G. Klein

Peter G. Klein

Baylor University - Hankamer School of Business; Norwegian School of Economics (NHH) - Department of Strategy and Management; Ludwig von Mises Institute

Marc R. Saidenberg

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: August 6, 2008

Abstract

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

Klein, Peter G. and Saidenberg, Marc R., Organizational Structure and the Diversification Discount: Evidence from Commercial Banking (August 6, 2008). CORI Working Paper No. 2008-01 (Earlier Version: CORI Working Paper No. 2005-06); Journal of Industrial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=721566

Peter G. Klein (Contact Author)

Baylor University - Hankamer School of Business ( email )

Waco, TX 76798
United States
254-710-4903 (Phone)

Norwegian School of Economics (NHH) - Department of Strategy and Management ( email )

Breiviksveien 40
N-5045 Bergen
Norway

Ludwig von Mises Institute ( email )

Auburn, AL
United States

Marc R. Saidenberg

affiliation not provided to SSRN

No Address Available

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