Product diversification and bank performance: Does ownership structure matter?

Using detailed data on control chains of 710 European commercial banks, we test whether the presence of some categories of controlling shareholders affects product diversification performance. We find that when banks have no controlling shareholder or have only family and state shareholders activity diversification yields diseconomies. However, as long as the control chain involves banking institutions, institutional investors, industrial companies or any other combination of these shareholder categories, banks benefit from diversification economies: they display higher profitability, lower earnings volatility and lower default risk. This is potentially because such categories of shareholders bring additional skills to manage diverse activities. A further exploration shows that such mitigating roles are greater for domestic and diversified shareholders. Our findings provide insights on why banks suffer from greater activity diversification and have several policy implications.