Do Financial Conglomerates Create or Destroy Economic Value?
46 Pages Posted: 10 Sep 2006 Last revised: 15 Jun 2013
Date Written: July 15, 2008
This paper investigates whether functional diversification is value-enhancing or value-destroying in the financial services sector, broadly defined. Based on a U.S. dataset comprising approximately 4,060 observations covering the period 1985-2004, we report a substantial and persistent conglomerate discount among financial intermediaries. Our results suggest that it is diversification that causes the discount, and not that troubled firms diversify into other more promising areas. In addition, the discount applies to all financial services activity-areas with the exception of investment banking and is stable over different combinations of financial activity-areas with the exception of commercial banking units combined with insurance companies and/or investment banking activities.
Keywords: Diversification, Banking, Organizational structure, Financial sector, Firm valuation
JEL Classification: G20, G32, G34
Suggested Citation: Suggested Citation