Does the Stock Market Value Bank Diversification?

Baele, Lieven; Jonghe, Olivier De; Vennet, Rudi Vander

doi:10.2139/ssrn.883593

Cited by 302 publications

(119 citation statements)

References 30 publications

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“…Some studies show that there is no benefit to diversification such as those of Stiroh (2004;Hirtle and Stiroh, 2007;Mercieca et al, 2007). In contrast, other studies like those of (Landskroner et al, 2005;Baele et al, 2007;Sanya Wolfe, 2011) found that diversification plays a key role in stimulating banking stability. Despite the remarkable momentum of income diversification, the relevant literature is scarce and undeveloped.…”

Section: Introductionmentioning

confidence: 99%

“…In this regard, Amidu and Wolfe (2013) believe that competition forces banks to adopt diversification strategies, which would affect banking risk. In addition to changes in competition that pushed banks to diversify their activities, there is what is known as the hedging strategy (Froot and Stein, 1998), a mechanism to improve profitability and operational efficiency of banks (Landskroner et al, 2005) and to strengthen the function of banks as delegated monitors (Baele et al, 2007).…”

Section: Introductionmentioning

confidence: 99%

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The Effect of Diversification of Banking Products on the Relationship between Market Power and Financial Stability

Mensi¹,

Labidi²

2015

American Journal of Economics and Business Administration

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Abstract:In the context of financial liberalization, increased competition has spurred financial institutions to develop new products and new activities in order to meet demand, market development and increased competitiveness. This has made the relationship between market structure and financial stability more complicated and its study through the channel of diversification remains an unexplored area. The purpose of this paper is to test the interaction between market power, diversification and financial (in) stability. To this end, we examine a sample of 18 countries in the MENA region and 157 commercial banks during the period 2000-2013. Supporting the "competition-instability" hypothesis, our results revealed that low market power banks in the MENA region are less robust and more unstable when they less or poorly diversify their activities. Moreover, financial instability in this sector may result from a fierce competition among banks born from the desire to distinguish themselves by offering various nontraditional products, for which banks lack the experience to control its risks.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

The Effect of Diversification of Banking Products on the Relationship between Market Power and Financial Stability

Mensi¹,

Labidi²

2015

American Journal of Economics and Business Administration

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“…Although a number of studies have attempted to shed light on the effect of diversification on bank performance, they have provided mixed results. For example, whereas Baele et al (2007) demonstrate that diversification increases bank franchise values and decreases idiosyncratic risks among European banks, Leaven and Levine (2007) find a diversification discount in financial conglomerates based on cross-country data. Moreover, Stiroh and Rumble (2006) show that although U.S. financial holding companies can benefit from diversification, these benefits are offset by an increase in exposure to highly volatile non-interest income business.…”

Section: Introductionmentioning

confidence: 99%

How does the stock market value bank diversification? Empirical evidence from Japanese banks

Sawada

2013

Pacific-Basin Finance Journal

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This paper empirically examines the effect of bank's revenue diversification across different activities on the stock-based return and risk measures using data on the Japanese banking sector. In the analyses, we measure non-interest income share as a measure for revenue diversification of banks. These analyses confirm the positive effect of revenue diversification by increasing non-interest income share on the franchise values of banks, while there is no strong evidence that it reduce bank risks. In contrast, when non-interest income is broken down into its constituent parts-fee income, trading income and other non-interest income-we find that a shift toward fee income-generating business decreases all types of risks (systematic risk, idiosyncratic risk, and total risk). Furthermore, we find that the effects of bank's revenue diversification on franchise value and risks are contingent on organizational forms and performance of traditional banking business. JEL Classification: G11, G21, G28

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“…Hughes, Lang, Moon, and Pagano (1997) proposed the market-value frontier and the shortfall measure of performance. Several studies have used either this measure of performance or the noise-adjusted Tobin's q ratio derived from it: Habib and Ljungqvist (2005), Baele, DeJonghe, and Vander Vennet (2007), DeJonghe and Vander Vennet (2005), , Hughes, Lang, Mester, and Moon (1999), Hughes, Mester, and Moon (2001), Hughes, Lang, Mester, Moon, and Pagano (2003), and Hughes and Mester (2013b).…”

Section: Literature Reviewmentioning

confidence: 99%

Measuring agency costs and the value of investment opportunities of US bank holding companies with stochastic frontier estimation

Hughes¹,

Mester²,

Moon

2017

Handbook of Competition in Banking and Finance

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract By eliminating the influence of statistical noise, stochastic frontier techniques permit the estimation of the best-practice value of a firm's investment opportunities and the magnitude of a firm's systematic failure to achieve its best-practice market value -a gauge of the magnitude of agency costs. These frontiers are estimated from the performance of all firms in the industry and, thus, capture best-practice performance that is, unlike Tobin's q ratio, independent of the managerial decisions of any particular firm. Terms of use: Documents inUsing the frontier measure of performance applied to 2007 data on top-tier, publicly traded U. S. bank holding companies, we obtain evidence on market discipline: we find that higher managerial ownership at most banks tends to align the interests of insiders with those of outside owners and to be associated with improved financial performance; at most banks, higher blockholder ownership is associated with improved financial performance obtained from blockholders' monitoring; and, at most banks, higher product-market concentration is associated with poorer financial performance and the so-called managerial quiet life.Using the frontier measure of investment opportunities, we find evidence that banks with relatively higher-valued investment opportunities achieve less of their potential market value, while banks with lowervalued opportunities achieve more of their potential value. In spite of their lower-valued opportunities, these banks, on average, achieve the same Tobin's q ratio and, thus, appear better able to exploit their less valuable investment opportunities. Our results suggest that higher-valued opportunities may reduce managers' performance pressure and provide a stronger incentive to consume agency goods.

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Does the Stock Market Value Bank Diversification?

Cited by 302 publications

References 30 publications

The Effect of Diversification of Banking Products on the Relationship between Market Power and Financial Stability

The Effect of Diversification of Banking Products on the Relationship between Market Power and Financial Stability

How does the stock market value bank diversification? Empirical evidence from Japanese banks

Measuring agency costs and the value of investment opportunities of US bank holding companies with stochastic frontier estimation

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