Identifying the Valuation Effects and Agency Costs of Corporate Diversification: Evidence from the Geographic Diversification of U.S. Banks

Abstract

This paper assesses the impact of the geographic diversification of bank holding company (BHC) assets across the United States on their market valuations. Using two new identification strategies based on the dynamic process of interstate bank deregulation, we find that exogenous increases in geographic diversity reduced BHC valuations. We also find that the geographic diversification of BHC assets increased insider lending and reduced loan quality. Taken together, these findings are consistent with theories predicting that geographic diversity intensifies agency problems. (JEL G34, L22, G21, G24) Does the geographic diversification of bank holding company (BHC) assets increase or decrease their corporate valuations? Geographic diversity could exert a valuation-enhancing effect by boosting economies of scale (

Competition and bank stability

“…As more states engaged in the enactment of reciprocal banking agreements, the number of competitors that can enter a banking market increased over time. Overall however, the state-specific process of interstate banking deregulation seems somewhat chaotic, rendering the gradual removal of barriers to entry random (Goetz et al, 2013).…”

“…Earlier research examined how the process of interstate banking deregulation affects bank value and risk as it allowed banks to diversify geographically (Goetz et al, 2013(Goetz et al, , 2016, but it has not examined how an increase in competition affects incumbent banks' stability. There is a large literature, however, examining how the state-wide deregulation of interstate banking and branching restrictions in the United States affects bank behavior and performance.…”

“…6 Goetz et al (2013) find that distance plays an important role in a bank's decision to expand geographically.…”

Competition and Bank Opacity

“…As emphasized by Goetz et al (2013), not only did states begin interstate deregulation in different years, these reforms progressed in a state-specific process of bilateral and multilateral agreements. Thus, we use several time-varying measures of the degree to which a state's banking market was exposed to competition from BHCs in other states.…”

Does Opening Complaints Data Change Company and Consumer Behavior? Evidence from the Consumer Financial Protection Bureau

“…Given that the geographic diversification of banks reduces bank valuations by worsening agency problems ( Goetz, Laeven and Levine 2013), we might expect exposed banks located in areas of low social mobility to have more complaints (perhaps if customers in such areas are treated less satisfactorily for their relatively lower incomes, for example). Similarly, highly mobile areas might be anticipated to generally report fewer complaints by virtue of the preferential treatments some richer individuals might experience due to their relatively high financial worth and reference incomes.…”