Divestitures and the financial conglomerate excess value

Abstract

We study a sample of the world’s largest financial conglomerates from 15 countries and we track their largest divestitures over the period 2005–2016. We develop a novel market-based metric to analyse the impact of divestitures on financial conglomerate excess value, and our findings point to divestitures having a significant impact on financial conglomerate valuation, contributing to a reduced conglomerate discount. Our results are driven by sales of financial service assets. Selling assets unrelated to the financial sector has no significant effect on conglomerate excess value. These results are robust with the inclusion of multiple control variables and alternative econometric model specifications. Altogether these results cast doubts on the existence of large benefits for financial conglomerates from combining financial service activities. This study has implications both for financial conglomerate boards who might direct their strategies to downsize their firms, and for regulators who address issues related to financial stability.