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How does the stock market value bank diversification? Empirical evidence from Japanese banks

Michiru Sawada

MPRA Paper from University Library of Munich, Germany

Abstract: This paper empirically examines the effect of bank’s revenue diversification across different activities on the stock-based return and risk measures using data on the Japanese banking sector. In the analyses, we measure non-interest income share as a measure for revenue diversification of banks. These analyses confirm the positive effect of revenue diversification by increasing non-interest income share on the franchise values of banks, while there is no strong evidence that it reduce bank risks. In contrast, when non-interest income is broken down into its constituent parts—fee income, trading income and other non-interest income—we find that a shift toward fee income-generating business decreases all types of risks (systematic risk, idiosyncratic risk, and total risk). Furthermore, we find that the effects of bank’s revenue diversification on franchise value and risks are contingent on organizational forms and performance of traditional banking business.

Keywords: Revenue diversification; Bank stock return; Bank risk; Franchise value (search for similar items in EconPapers)
JEL-codes: G11 G21 G28 (search for similar items in EconPapers)
Date: 2011-11, Revised 2012-11
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Journal Article: How does the stock market value bank diversification? Empirical evidence from Japanese banks (2013) Downloads
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