Faculty of Economics and Business Administration Publications Database

The Anatomy of Bank Diversification

Elsas, Ralf
Holzhäuser, Markus
Volume: 34
Number: 6
Pages: 1274 - 1287
Month: June
ISSN-Print: 0378-4266
Link External Source: Online Version
Year: 2010
Keywords: Bankdiversification; Conglomerate discount; Universal banking

We use panel data from nine countries over the period 1996–2008 to test how revenue diversification affects bank value. Relying on a comprehensive framework for bank performance measurement, we find robust evidence against a conglomerate discount, unlike studies concerned with industrial firms. Rather, diversification increases bank profitability and, as a consequence also market valuations. This indirect performance effect does not depend on whether diversification was achieved through organic growth or through M&A activity. We further demonstrate that previous results in the literature on the impact of diversification on bank value presumably differ due to the way diversification is measured, and the negligence of the indirect value effect via bank profitability. Our evidence against a conglomerate discount in banking remains robust also during the sub-prime crisis.