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The Impact of Diversification on Bank Holding Company Performance

Liu, Chinpiao
http://rave.ohiolink.edu/etdc/view?acc_num=csu1260155499

Abstract Details

2009, Doctor of Business Administration, Cleveland State University, Nance College of Business Administration.
Bank holding companies (BHCs) are hypothesized to achieve potential portfolio and synergistic benefits through various forms of diversification. On the other hand, diversification can generate new managerial problems or agency costs. This dissertation examines five issues. 1) Do all the various forms of diversification have the same favorable/unfavorable effects on BHCs’ performance?, 2) Are there any interaction effects among the various types of diversification?, 3) Since the business strategies of large BHCs are different from those of small BHCs, do the diversification effects vary by size?, 4) How did diversification impact BHC performance during the 2007-2008 financial crisis?, and 5) What types of diversification-associated Merger and Acquisitio should BHCs employ to take advantages of diversification benefits?Overall Results - The study finds that not all forms of diversifications have the same impacts on BHCs’ performance. Some types of diversification support the hypothesis of favorable portfolio benefits and cost synergies, while other findings support the hypothesis of unfavorable agency costs. Non-interest-income diversification has the strongest favorable impacts on BHCs’ performance as it both increases returns and reduces portfolio risk. Security diversification has unfavorable impacts on accounting returns but favorable impacts on market returns. Off-balance-sheet diversification has unfavorable impacts on risk and it does not contribute to BHCs’ returns. The largest unfavorable impact is on derivatives losses. Moreover, for some diversification measures, the impacts depend on the scale of their associated activities. When the scale of the diversified activity is large enough, the net diversification impact may change its sign. In general, among the various diversified activities where the sign of the impacts switch with scales, loan diversification switches direction from favorable to unfavorable. BHCs might tend to make increasingly risky loans when their scale of loans expands. Moreover, agency problems might also become difficult to control. On the other hand, security diversification tends to switch the direction of impact from unfavorable to favorable. With larger security portfolios, BHCs are more capable of reducing risk and increasing returns with a wide selection of securities. Results for Various Size Banks - For small banks, larger community banks, and regional BHCs, non-interest-income and loan diversifications generally enhance performance while security portfolio and off-balance sheet diversifications reduce performance. For very large money center banks, diversification into off-balance-sheet activities generates the strongest performance benefit, while domestic geographic, loan and non-interest income diversifications also have favorable impacts. On the other hand, security portfolio diversification has a mix of both favorable and unfavorable effects. Focusing on BHCs with international loan portfolios, off-balance-sheet diversification creates the strongest performance benefits, followed by domestic geographic diversification. On the other hand, international geographic and loan diversifications, along with security portfolio and non-interest income diversifications reduce bank performance. Over all, it appears that larger banks (with the exception of international banks) achieve more favorable diversification benefits. On the other hand, the interaction effects of various forms of diversifications appear to benefit small BHCs the most. Smaller BHCs may not benefit through single channel diversification because doing so likely increases operating costs while the bank remains unable to fulfill their target customers’ full range of service needs. However, by multi-channel diversification, the interaction benefits of diversifications can be achieved. On the other hand, larger BHCs can benefit through single channel diversification because they have more market power and are able to enjoy the benefits of diversified portfolios and cost synergies generated through economies of scale. However, multi-channel diversification may make larger BHCs more difficult to manage. For example, they might engage in unfamiliar and risky business where operating and agency costs offset potential portfolio benefits. Overall, diversification generally supports the hypothesis of favorable portfolio benefits and cost synergies. Furthermore, diversification has a consistently more favorable impact during the recent financial crisis. In general, BHCs with widely diversified activities will suffer less than other BHCs with concentrated activities when financial crisis occurs. Impact of Merger Activity - The study also finds that Merger and Acquisition activity associated with several forms of diversification improve BHC performance, while the other forms of diversification have insignificant impacts on performance. The overall implications for BHCs are that not all diversification-driven mergers generate benefits for BHCs. Hence, BHCs should choose the right mergers which meet their business goals.
Alan Reichert, Ph.D. (Committee Chair)
Haigang Zhou, Ph.D. (Committee Member)
Walter Rom, Ph.D. (Committee Member)
Dieter Gramlich, Ph.D. (Committee Member)
364 p.
Banking
Diversification; Bank holding company

Recommended Citations

Citations

  • Liu, C. (2009). The Impact of Diversification on Bank Holding Company Performance [Doctoral dissertation, Cleveland State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=csu1260155499

    APA Style (7th edition)

  • Liu, Chinpiao. The Impact of Diversification on Bank Holding Company Performance. 2009. Cleveland State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=csu1260155499.

    MLA Style (8th edition)

  • Liu, Chinpiao. "The Impact of Diversification on Bank Holding Company Performance." Doctoral dissertation, Cleveland State University, 2009. http://rave.ohiolink.edu/etdc/view?acc_num=csu1260155499

    Chicago Manual of Style (17th edition)

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© 2009, all rights reserved.
This open access ETD is published by Cleveland State University and OhioLINK.