Discussion Paper Details

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Title: Is There a Diversification Discount in Financial Conglomerates?

Author(s): Luc Laeven and Ross Levine

Publication Date: July 2005

Keyword(s): agency costs, banking, corporate diversification and economies of scope

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Laeven, L and Levine, R. 2005. 'Is There a Diversification Discount in Financial Conglomerates?'. London, Centre for Economic Policy Research.