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Diversification and target leverage of financial institutions

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  • Jouida, Sameh
  • Hellara, Slaheddine

Abstract

This study examines the relationship between financial institutions’ corporate strategy (i.e. asset side diversification) choices and capital structure decisions. Using a sample of 412 French financial institutions for the period 2002–2012, we first estimate target debt ratios. The partial adjustment model is used to investigate whether the institutions’ actual leverage is related to their activity and geographic diversification choices. The main results suggest a negative relationship between diversification and leverage that holds for both activity and geographic diversification. Furthermore, the speed of adjustment to target leverage found for French financial institutions is higher than those estimated for other US and European banks in the literature. These findings are robust to alternative methods of assessing target leverage and institution classification. The financial institutions that are geographically diversified have less debt than those that diversify their activities.

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  • Jouida, Sameh & Hellara, Slaheddine, 2018. "Diversification and target leverage of financial institutions," Journal of Multinational Financial Management, Elsevier, vol. 46(C), pages 11-35.
    • Handle: RePEc:eee:mulfin:v:46:y:2018:i:c:p:11-35
    DOI: 10.1016/j.mulfin.2018.06.001
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    More about this item

    Keywords

    Geographic diversification; Activity diversification; Capital structure; Target leverage; Financial institutions;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L19 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Other
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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