Working Paper: CEPR ID: DP5121
Authors: Luc Laeven; Ross Levine
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.
Keywords: agency costs; banking; corporate diversification; economies of scope
JEL Codes: G20; G30; L20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agency problems (G34) | market valuations (G19) |
| diversification discount (G39) | market valuations (G19) |
| bank diversity (G21) | diversification discount (G39) |
| bank-specific traits (G21) | market valuations (G19) |
| country-level characteristics (O57) | market valuations (G19) |
| mixture of financial activities (G29) | market valuations (G19) |
| diversity (J15) | excess value (D46) |
| diversity (J15) | market valuations (G19) |