Abstract
AbstractWe question whether the international diversification of multinational banks creates or destroys shareholder value. Based on a sample of 384 listed banks from 56 countries we provide new and robust evidence that bank cross‐border activities create shareholder value, as shown by an economically and statistically significant premium for international diversification. Our results are confirmed controlling for bank fixed effects, time‐varying bank characteristics, reverse causality, functional diversification, and instrumenting for the choice to expand abroad. The increase in shareholder value is slightly larger for banks in the middle range of international diversification and in the case of expansion towards less developed countries.
Highlights
Introduction and motivationsMultinational corporations are a distinctive feature of today’s global economy
We focus on commercial banks, which have compelling reasons for international diversification due to the possession of soft information and intangible assets that are extremely difficult to transact via external markets and contractual arrangements
Panels 2 and 3 report the results obtained from robust regressions, that allow to control that our results are not driven by extreme values (Li, 1985), including respectively country fixed effects (Panel 2) and bank fixed effects (Panel 3)
Summary
Multinational corporations are a distinctive feature of today’s global economy. And among multinational corporations, multinational banks have a prominent role: according to Forbes, three of the five largest multinational corporations in the world are banking groups. In the case of banks, the motivations for geographical diversification can be different than that of manufacturing firms (Buckley and Casson, 1976; Williams, 1997), because of factors such as the role of information, the importance of a physical presence to develop the personal relationships that are essential to the supply most retail financial services (Rajan, 1998), the value of intangible assets and reputation, the role of regulation (John et al, 2000), and the importance of the institutional features of countries. Empirical studies on crises are mostly limited to the unstable periods (see e.g., De Young and Toma, 2013 for a recent analysis of the 2008-2010 crisis period)
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