Do Financial Conglomerates Create or Destroy Economic Value?

Abstract

This paper investigates whether functional diversification is value-enhancing or value-destroying in the financial services sector, broadly defined. Based on a U.S. dataset comprising approximately 4,060 observations covering the period 1985-2004, we report a substantial and persistent conglomerate discount among financial intermediaries. The study differs materially from earlier work on scope dimensions of financial institution structures. Our results suggest that it is diversification that causes the discount, and not that troubled firms diversify into other more promising areas. In addition, the discount applies to all financial services industries with the exception of investment banking and is stable over different combinations of financial activity areas with the exception of commercial banking units combined with insurance companies and/or investment banking activities. Finally, our results reveal that geographic diversification per se is not associated with a significant discount. Although geographic diversity is value destroying in all financial services activity-areas when there are more geographic segments and the activities are distributed relatively evenly over these segments.