Monday, March 8, 2010

Why are diversified firms less profitable than single-segment ones?

New research from Peter Klein finds that the "diversification discount" for banks is related to organizational structure.  He finds two forces pulling in opposite directions:
  1. Membership in a [diversified] holding company gives a bank access to the parent organization’s capital and liquidity, which allows banks to do more lending, and hold less capital, than unaffiliated banks; however
  2. Bank holding companies with many subsidiaries are less profitable and have lower q ratios than similar holding companies with fewer subsidiaries.

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