Do financial conglomerates create or destroy value? Evidence for the EU |
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Authors: | Iman van Lelyveld Klaas Knot |
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Institution: | aDe Nederlandsche Bank, Supervisory Policy Division, P.O. Box 9108, 1000 AB Amsterdam, Netherlands;bUniversity of Groningen, P.O. Box 800, 9700 AV Groningen, Netherlands |
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Abstract: | There is an ongoing debate about whether firm focus creates or destroys shareholder value. Earlier literature has shown significant diversification discounts: firms that engage in multiple activities are valued lower. Various factors are important in determining the size of the discount, for example cross-subsidization and agency problems. The existing literature, however, generally focuses on non-financial firms or on banks combining investment and commercial banking. Our paper focuses specifically on the valuation of bank-insurance conglomerates. We find no universal diversification discount but significant variability. The discount is explained by the size (increasing), the familiarity with the conglomerate business model (decreasing) and the risk profile (decreasing). Our results are robust to the historical origin, the merger record and the age of the conglomerate, as well as peer group specification and outlier elimination. |
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Keywords: | Financial conglomerates Firm valuation Diversification discount Shareholder value |
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