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Is There a Diversification Discount in Financial Conglomerates?

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  • Levine, Ross
  • Laeven, Luc

Abstract

This paper investigates whether the diversity of activities conducted by financial institutions influences their market valuations. We find that there is a diversification discount: The market values financial conglomerates that engage in multiple activities, e.g., lending and non-lending financial services, lower than if those financial conglomerates were broken into financial intermediaries that specialize in the individual activities. While difficult to identify a single causal factor, the results are consistent with theories that stress intensified agency problems in financial conglomerates that engage in multiple activities and indicate that economies of scope are not sufficiently large to produce a diversification premium.

Suggested Citation

  • Levine, Ross & Laeven, Luc, 2005. "Is There a Diversification Discount in Financial Conglomerates?," CEPR Discussion Papers 5121, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5121
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    More about this item

    Keywords

    Corporate diversification; Banking; Economies of scope; Agency costs;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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