Abstract
This paper investigates whether geographic diversification is value-enhancing or valuedestroying in the financial services sector, broadly defined. Our dataset comprises approximately 3,579 observations over the period from 1985 to 2004 and covers the entire range of U.S. financial intermediaries – commercial banks, investment banks, insurance companies, asset managers, and financial infrastructure services firms. We use three alternative measures of geographic diversification: (1) a dummy variable whether the firm reports more than one geographic segment, (2) the percentage of sales from non-domestic operations, and (3) a sales-based Herfindahl-Hirschman index (HHI). Our results indicate that on a stand-alone basis geographic diversification, as measured by the dummy variable or the percentage of sales from non-domestic operations, is not associated with a significant valuation discount in financial intermediaries. However, geographic diversity is value-destroying when measured by the HHI. We conclude that geographic diversification is value-destroying when there are more geographic segments and the activities are distributed relatively evenly over these segments. We observe an exception in the investment banking sector. The results are robust after taking into account functional diversification of the firms as well as a potential endogeneity of both functional and geographic diversification.
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