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Geographic Diversification, Bank Holding Company Value, and Risk


  • Earlier versions of this paper were circulated under the title of “Geographic Diversification, Distance, BHC Return and Risk,” and were presented at the Financial Intermediation Research Society conference on Banking, Corporate Finance and Intermediation, in Shanghai, China, June 2006; the Financial Management Association Meeting of 2005 in Chicago, Villanova University; and Bank of Israel Seminar Series. We would like to thank all the seminar participants. Thanks are also due to Robert DeYoung, Michael Lizzul, Iqbal Mansur, Connie Mao, Mike Pagano, David Reeb, James Spence, two anonymous referees, and, particularly, Deborah Lucas, the editor of the JMCB for their insightful comments and suggestions, which have considerably improved the quality of the paper. Any remaining errors are ours.


We assess the association between geographic diversification and bank holding company (BHC) value and risk, controlling for the distance between the headquarters and branches. The distance-adjusted deposit dispersion index used as a measure of geographic diversification accounts for the number of locations where a BHC operates, the level of activity in each location, and the distance between a BHC and its branches. We find that geographic diversification is associated with BHC value enhancement and risk reduction, increased distance between a BHC and its branches is associated with firm value reduction and risk increase, and geographic diversification across more remote areas is associated with greater value enhancement but smaller risk reduction.