The Valuation Effects of Geographic Diversification: Evidence From U.S. Banks

IMF Working Papers, February 1, 2012

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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 novel identification strategies based on the dynamic process of interstate bank deregulation, the authors find that exogenous increases in geographic diversity reduce BHC valuations.
These findings are consistent with the view that geographic diversity makes it more difficult for shareholders and creditors to monitor firm executives, allowing corporate insiders to extract larger private benefits from firms.

Exogenous increases in geographic diversity reduce BHC valuations.
Geographic diversity can impede monitoring by shareholders and creditors.
Impeded monitoring allows corporate insiders to extract larger private benefits from firms.

Two novel identification strategies are used.
Identification strategies are based on the dynamic process of interstate bank deregulation.

Greater geographic diversification of BHC assets may have adverse valuation effects due to weakened monitoring.
Regulatory and corporate governance mechanisms that strengthen monitoring across geographically dispersed operations could mitigate valuation losses associated with diversification.

Subjects: Asset and liability management, Asset valuation, Banking, Econometric analysis, Estimation techniques, Gravity models, National accounts, Personal income, Population and demographics
Keywords: Agency problems, Asset valuation, bank deregulation, BHC asset diversification, BHC assets, BHC diversification increase, BHC diversity, BHC valuation, Corporate insiders, Corporate valuation, Economies of scope, Estimation techniques, Geographic Corporate diversification, Global, Gravity models, gravity-deregulation model, Personal income, WP