ORGANIZATIONAL STRUCTURE AND THE DIVERSIFICATION DISCOUNT: EVIDENCE FROM COMMERCIAL BANKING

Authors


  • *We are grateful to Peter Carstensen, Tom Gilligan, Sandy Klein, Larry Lang, Eric Powers, Tara Rice, Dan Rubinfeld, Joe Sinkey, Phil Strahan, the Editor and two anonymous referees for helpful comments and suggestions, and to Per L. Bylund for research assistance. The opinions expressed in this paper are not necessarily those of the Federal Reserve Bank of New York or of the Federal Reserve System.

Abstract

We provide evidence on organizational structure and performance at bank holding companies (BHC's). First, we show that a BHC's member banks benefit from access to internal capital markets. Second, we ask if these benefits are best realized within loosely structured, decentralized organizations or more consolidated, centralized firms. We find that BHC's with many subsidiaries are less profitable and have lower q ratios than similar BHC's with fewer subsidiaries. However, because we study multi-unit firms in a single industry, our results suggest that the diversification discount reported in the corporate finance literature reflects not only industry diversification, but also organizational structure.

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