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Diversification and target leverage of financial institutions

Sameh Jouida and Slaheddine Hellara

Journal of Multinational Financial Management, 2018, vol. 46, issue C, 11-35

Abstract: This study examines the relationship between financial institutions’ corporate strategy (i.e. asset side diversification) choices and capital structure decisions. Using a sample of 412 French financial institutions for the period 2002–2012, we first estimate target debt ratios. The partial adjustment model is used to investigate whether the institutions’ actual leverage is related to their activity and geographic diversification choices. The main results suggest a negative relationship between diversification and leverage that holds for both activity and geographic diversification. Furthermore, the speed of adjustment to target leverage found for French financial institutions is higher than those estimated for other US and European banks in the literature. These findings are robust to alternative methods of assessing target leverage and institution classification. The financial institutions that are geographically diversified have less debt than those that diversify their activities.

Keywords: Geographic diversification; Activity diversification; Capital structure; Target leverage; Financial institutions (search for similar items in EconPapers)
JEL-codes: G21 G23 G32 L19 L25 (search for similar items in EconPapers)
Date: 2018
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