Financial Conglomerates and Business Cycle
Date Issued
2009
Date
2009
Author(s)
Chen, Mei-Ling
Abstract
This paper investigates whether the diversity of activities conducted by financial institutions influences their market valuations during recessions. We find that there is a diversification premium during recessions: The market values of financial conglomerates that engage in multiple activities, e.g., lending and non-lending financial services, are larger than if those financial conglomerates were broken into financial intermediaries that specialize in the individual activities during recessions. While difficult to identify a single causal factor, the results are consistent with theories that stress intensified agency problems in financial conglomerates engaged in multiple activities and indicate that economies of scope are sufficiently large to produce a diversification premium.
Subjects
Corporate diversification
Banking
Business cycle
Type
thesis
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