Financial Industry Diversification: An Empirical Analysis
von der Lieth, James P
This paper uses a quantitative approach to determine whether or not diversified financial institutions perform better than specialized financial institutions for shareholders. It aims to identify whether or not economies of scope benefits of financial conglomerates outweigh the negative implications of providing a wide variety of services. Other academic work has identified economies of scope benefits in the financial sector, including the ability to market diversified services to existing customers, sharing of fixed costs, and ability to take advantage of the moral hazard of the FDIC. (Laeven and Levine) Possible diseconomies of scope effects include exacerbating agency problems between managers and investors, more precarious risk management and invoking inner-company conflicts of interest due to offering both investment services and banking services. This paper will identify which financial institutions business model has historically provided the best returns to shareholders since the repeal of the Glass-Steagall, when United States financial institutions were permitted to diversify their services to the greatest extent since the 1920’s.
financial industry diversification, repeal of Glass-Steagall, economies of scope