Geographic diversification and firm value in the financial services industry

Markus Schmid and Ingo Walter

Journal of Empirical Finance, 2012, vol. 19, issue 1, 109-122

Abstract: This paper investigates whether geographic diversification is value-enhancing or value-destroying in the financial services sector, broadly defined. Our dataset comprises approximately 3579 observations over the period from 1985 to 2004 and covers the entire range of U.S. financial intermediaries — commercial banks, investment banks, insurance companies, asset managers, and financial infrastructure services firms. We use two alternative measures of geographic diversification: (1) a dummy variable whether the firm reports more than one geographic segment and (2) the percentage of sales from non-domestic operations. Our results indicate that geographic diversification is not associated with a significant valuation discount in financial intermediaries. However, when accounting for the firms' main activity-areas, we find evidence of a significant discount associated with geographic diversification in securities firms and a premium in credit intermediaries and insurance companies. All these results are robust after taking into account functional diversification of the firms, a potential endogeneity of both functional and geographic diversification, and a potential value transfer from equity to debt holders by using estimates of the market value of debt.

Keywords: Geographic diversification; Functional diversification; Organizational structure; Financial intermediaries; Firm valuation (search for similar items in EconPapers)
JEL-codes: G20 G32 G34 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:19:y:2012:i:1:p:109-122

DOI: 10.1016/j.jempfin.2011.11.003

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