Diversification discount in U.S. banks
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School of Business |
Master's thesis
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Date
2017
Department
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Mcode
Degree programme
Finance
Language
en
Pages
73
Series
Abstract
This paper examines whether diversity of activities among banks affects their market valuations and how this effect on value varies in time, especially during the financial crisis of 2007 to 2009 and its aftermath. I find evidence that diversified banks that participate in multiple activities are valued lower by the market than if those banks were broken into financial institutions that specialize solely in one activity. The effect of diversity of activities on value is separated from several other effects that could induce an effect on the value of the banks. I also find that the level of the observed diversification discount has decreased significantly throughout the sample period of 2006 to 2016. The underlying reasons for these findings remain opaque, but they suggest that the diversified banks’ economies of scope and benefits of having internal capital markets are not enough to counter the resulting drawbacks due to agency problems and inefficient capital allocation.Description
Thesis advisor
Jylhä, PetriKeywords
diversification discount, financial conglomerate, financial crisis, bank