How does the stock market value bank diversification? Empirical evidence from Japanese banks

Abstract

This paper empirically examines the effect of bank's revenue diversification across different activities on the stock-based return and risk measures using data on the Japanese banking sector. In the analyses, we measure non-interest income share as a measure for revenue diversification of banks. These analyses confirm the positive effect of revenue diversification by increasing non-interest income share on the franchise values of banks, while there is no strong evidence that it reduce bank risks. In contrast, when non-interest income is broken down into its constituent parts-fee income, trading income and other non-interest income-we find that a shift toward fee income-generating business decreases all types of risks (systematic risk, idiosyncratic risk, and total risk). Furthermore, we find that the effects of bank's revenue diversification on franchise value and risks are contingent on organizational forms and performance of traditional banking business. JEL Classification: G11, G21, G28

A Study on the Company Value of Public Banks Listed in the Indonesian Stock Exchange Between 2010 – 2015

“…This fact also agrees with the signal theory that says that Income Diversification relay significantly positive signals to companies. Results of this research support those of Sawada (2013), Afza et al (2008), Putra (2016.…”

“…Research on NPL ratio against company value shows significantly negative influence as mentioned by Repi et al (2015), Yao and Liang (2005) and , while Putra (2016) and Karim and Alam (2013) stated that NPL does not affect company value. Research on income ratio other than interest or income diversification on company value reveals significantly positive effect as shown by Sawada (2013), Afza et al (2008), Ardian Prima Putra (2016) and , whereas Laeven and Levine (2005) and Clercq (2015) found no effect. Research on operational cost efficiency against company value shows significantly negative influence as found by Yao and Liang (2005) and Sawada (2013), while Clercq (2015 and Karim and Alam (2013) …”

“…He showed that ROA negatively affects company value, while LDR does not affect company value. Sawada (2013) carried out a research on the effect of income diversification and financial risk in banks in Japan on company value. He understood that income diversification positively affects company value, whereas BOPO and NPL negatively affect company value.…”

“…Research on non-performing loan or NPL against profitability shows significantly negative influence as described by Arif (2012), Malik (2015), ) Rodriguez (2014, whereas it is also found as to have no effect on profitability whatsoever by Jha and Hui (2012). Research on income ratio other than interest or income diversification against profitability indicates significantly positive influence as recorded by Sawada (2013), Bhatia et al (2012), Alper andAlbar (2011), Rodriguez (2014) and , while Wang et al (2015) and Afza et al (2008) found no effect of this measure on profitability. Research on operational cost efficiency shows significantly negative effect as found by Bhatia et al (2012), Almazari (2014) and Maredza (2014), whereas Rodriguez (2014 and Karim and Alam (2013), found no effect.…”

Diversification, capital structure, and performance: A simultaneous equation approach

“…The French financial institution's income is less diversified across lending and non‐lending activities showing that the financial industry is characterized by the diversification in related activities (Laeven & Levine, ). However, this result contradicts the findings of Sawada () for income diversification. The diversification in another sector can engender risks.…”