Working Paper: NBER ID: w11499
Authors: Luc Laeven; Ross Levine
Abstract: This paper investigates whether the diversity of activities conducted by financial institutions \ninfluences their market valuations. We find that there is a diversification discount: The market \nvalues financial conglomerates that engage in multiple activities, e.g., lending and non-lending \nfinancial services, lower than if those financial conglomerates were broken into financial \nintermediaries that specialize in the individual activities. While difficult to identify a single causal \nfactor, the results are consistent with theories that stress intensified agency problems in \nfinancial conglomerates that engage in multiple activities and indicate that economies of scope are \nnot sufficiently large to produce a diversification premium.
Keywords: diversification discount; financial conglomerates; market valuations
JEL Codes: G2; G3; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| diversification discount (G39) | market valuations (G19) |
| intensified agency problems (G34) | diversification discount (G39) |
| economies of scope (D26) | diversification premium (G19) |
| activity diversity (J62) | market valuations (G19) |