DP5121 Is There a Diversification Discount in Financial Conglomerates?
|Author(s):||Luc Laeven, Ross Levine|
|Publication Date:||July 2005|
|Keyword(s):||agency costs, banking, corporate diversification, economies of scope|
|JEL(s):||G20, G30, L20|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5121|
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.