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Is There a Diversification Discount in Financial Conglomerates?

59 Pages Posted: 1 Sep 2005  

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Ross Levine

UC Berkeley; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2005

Abstract

This paper investigates whether the diversity of activities conducted by financial institutionsinfluences their market valuations. We find that there is a diversification discount: The marketvalues financial conglomerates that engage in multiple activities, e.g., lending and non-lendingfinancial services, lower than if those financial conglomerates were broken into financialintermediaries that specialize in the individual activities. While difficult to identify a single causalfactor, the results are consistent with theories that stress intensified agency problems infinancial conglomerates that engage in multiple activities and indicate that economies of scope arenot sufficiently large to produce a diversification premium.

Suggested Citation

Laeven, Luc and Levine, Ross, Is There a Diversification Discount in Financial Conglomerates? (August 2005). NBER Working Paper No. w11499. Available at SSRN: https://ssrn.com/abstract=775989

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Ross Eric Levine (Contact Author)

UC Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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