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

DNB Working Papers
Date 6 May 2008

There is an ongoing debate whether firm focus creates or destroys shareholder value. Earlier literature has shown significant diversification discounts: firms that engage in multiple activities are valued less. Various factors are important in the size of the discount, for example crosssubsidization and agency problems. The extant literature, however, generally focuses on nonfinancial firms or traditional banking (cf Laeven and Levine (2007) and Schmid and Walter (2006)). Our paper focuses specifically on the valuation of bank-insurance conglomerates. We find no universal diversification discount but significant variability. Size, complexity and risk seem to be important determinants. JEL codes: G2, G3, L2 Key words: financial conglomerates, firm valuation