Is There a Diversification Discount in Financial Conglomerates?

This paper investigates whether the diversity of activities conducted by financial institutions
influences their market valuations. We find that there is a diversification discount: The market
values financial conglomerates that engage in multiple activities, e.g., lending and non-lending
financial services, lower than if those financial conglomerates were broken into financial
intermediaries that specialize in the individual activities. While difficult to identify a single causal
factor, the results are consistent with theories that stress intensified agency problems in
financial conglomerates that engage in multiple activities and indicate that economies of scope are
not sufficiently large to produce a diversification premium.