Is There a Diversification Discount in Financial Conglomerates?

Luc Laeven () and Ross Levine ()

No 5121, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper investigates whether the diversity of activities conducted by financial institutions influences their market valuations. We find that there is a diversification discount: The market values financial conglomerates that engage in multiple activities, e.g., lending and non-lending financial services, lower than if those financial conglomerates were broken into financial intermediaries that specialize in the individual activities. While difficult to identify a single causal factor, the results are consistent with theories that stress intensified agency problems in financial conglomerates that engage in multiple activities and indicate that economies of scope are not sufficiently large to produce a diversification premium.

Keywords: agency costs; banking; corporate diversification; economies of scope (search for similar items in EconPapers)
JEL-codes: G20 G30 L20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-sea
Date: 2005-07
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Related works:
Working Paper: Is There a Diversification Discount in Financial Conglomerates? (2005)
Journal Article: Is there a diversification discount in financial conglomerates? (2007)
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