Reassessment of Diversification Effects in U.S. Bank Holding Companies: Aquantile Regression Approach

Abstract

Heterogeneous patterns of the diversification effects are identified across the full distributions of various risk-adjusted performance measures and over time using a quantile regression of U.S. bank holding company data for the period 2000-2010. The net effect of income diversification is determined by a positive indirect effect from a diversified income structure and a negative direct effect from an increased share of non-interest income. The first main empirical finding shows a greater discount in the upper quantiles of the performance distributions. Second, the net diversification effect changes from a discount to a premium over time. These findings suggest that the diversification discount reflects a loss of comparative advantage at the early adjustment stage of income diversification. However, after the costly adjustment, the diversification benefit becomes dominant and the net effect becomes a diversification premium.