Date of Award

2012

Degree Type

Restricted to Claremont Colleges Dissertation

Degree Name

Economics, PhD

Program

School of Politics and Economics

Advisor/Supervisor/Committee Chair

Darren Filson

Dissertation or Thesis Committee Member

Thomas Borcherding

Dissertation or Thesis Committee Member

Arthur T. Denzau

Dissertation or Thesis Committee Member

James Mills

Terms of Use & License Information

Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2012 Ahmed Oweis

Keywords

bank holding companies, corporate diversification, diversification discount, event study, Financial Services Modernization Act, Gramm-Leach-Bliley Act

Subject Categories

Banking and Finance Law | Economics | Finance

Abstract

The Financial Services Modernization Act, also known as the Gramm-Leach-Bliley Act (GLBA), of 1999 has permitted U.S. bank holding companies (BHCs) to operate in non-banking activities that are financial in nature. This dissertation addresses the impact of this across-activity diversification within the U.S. financial services industry on the profitability and the risk-adjusted performance of bank holding companies. Using a variety of diversification measures, the study analyzes the relationship between corporate diversification and the financial performance of BHCs pre- and post-GLBA, from 1990 to 2011.

The analysis of the profitability-diversification relationship provides evidence that the negative impact of revenue diversification on the profitability of banking firms that exists in the literature is mainly due to measurement and model specification issues. Failure to differentiate between interest-versus-noninterest and banking-versus-nonbanking types of revenue diversification has resulted in using measures of the first type of diversification to study the second, leading to inaccurate results. Moreover, introducing nonlinearity to the relationship between revenue diversification and profitability provides evidence that this relationship is negative only at relatively low levels of diversification but positive if the level of diversification is sufficiently high. Controlling for these measurement and model specification issues results in profitability premium, rather than discount, that is associated with higher levels of revenue diversification.

The study also employs an event study methodology to measure how stock markets respond to mergers and acquisitions (M&As) in which BHCs acquire other banking and nonbanking financial targets. The cumulative abnormal returns (CARs) to acquirers and targets show that M&A that are either non-diversifying or diversifying within closely-related credit intermediation activities increase the value of merged firms. The effect of M&As that combine less-related financial activities on firm value is either negative or insignificant. This implies that market participants have better expectations of the future performance of less diversified firms in managing the risk-return trade-off. Comparing the average CARs of the pre- and post-GLBA eras supports this conclusion.

DOI

10.5642/cguetd/58

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