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Bank holding company diversification and production efficiency

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  • Elyas Elyasiani
  • Yong Wang

Abstract

Bank Holding Companies (BHCs) have been diversifying their businesses increasingly among banking, securities and insurance activities in the recent decades through establishment of Section 20 subsidiaries in earlier years and through formation of financial holding companies after the Gramm--Leach--Bliley Act (GLBA, 1999). This study examines whether BHC diversification is associated with improvement or detriment in its production efficiency. We apply the Data Envelopment Analysis (DEA) to calculate the Malmquist index of productivity, and the total factor productivity change for a sample of BHCs over the period 1997--2007. Two main results are obtained. First, technical efficiency is negatively associated with activity diversification and the effect is primarily driven by BHCs that did not experience diversification through Section 20 subsidiaries. Second, the degree of change in diversification over time is not associated with total factor productivity change but it is negatively associated with technical efficiency change. This latter relationship is also primarily exhibited for BHCs that did not establish Section 20 subsidiaries. It can be concluded that diversification is, on average, associated with lower production efficiency of BHCs, especially for those BHCs without first-mover advantage obtained through Section 20 subsidiaries. This is consistent with findings on diversification discount in the finance literature.

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  • Elyas Elyasiani & Yong Wang, 2012. "Bank holding company diversification and production efficiency," Applied Financial Economics, Taylor & Francis Journals, vol. 22(17), pages 1409-1428, September.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:17:p:1409-1428
    DOI: 10.1080/09603107.2012.657351
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    1. Saunders, Anthony & Walter, Ingo, 1994. "Universal Banking in the United States: What Could We Gain? What Could We Lose?," OUP Catalogue, Oxford University Press, number 9780195080698.
    2. Allen N. Berger & David B. Humphrey, 1992. "Megamergers in banking and the use of cost efficiency as an antitrust defense," Finance and Economics Discussion Series 203, Board of Governors of the Federal Reserve System (U.S.).
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    14. zhang, zhichao & Xie, Li & lu, xiangyun & zhang, zhuang, 2014. "Determinants of financial distress in u.s. large bank holding companies," MPRA Paper 53545, University Library of Munich, Germany.
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    18. Filson, Darren & Olfati, Saman, 2014. "The impacts of Gramm–Leach–Bliley bank diversification on value and risk," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 209-221.
    19. Cao, Ting & Cook, Wade D. & Kristal, M. Murat, 2022. "Has the technological investment been worth it? Assessing the aggregate efficiency of non-homogeneous bank holding companies in the digital age," Technological Forecasting and Social Change, Elsevier, vol. 178(C).
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    22. Badunenko, Oleg & Kumbhakar, Subal C. & Lozano‐Vivas, Ana, 2021. "Achieving a sustainable cost-efficient business model in banking: The case of European commercial banks," European Journal of Operational Research, Elsevier, vol. 293(2), pages 773-785.

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