Do financial conglomerates create or destroy value? Evidence for the EU

Iman van Lelyveld*, Klaas Knot

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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.

Original languageEnglish
Pages (from-to)2312-2321
Number of pages10
JournalJournal of Banking and Finance
Volume33
Issue number12
DOIs
Publication statusPublished - Dec 2009

Keywords

  • Diversification discount
  • Financial conglomerates
  • Firm valuation
  • Shareholder value

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