The Financial Conglomerate Discount: Insights from Stock Return Skewness

Abstract

Empirical evidence shows that diversified banks (i.e. financial conglomerates) trade at a discount compared to a matched portfolio of specialized stand-alone banks. While one strand of research explains this puzzle primarily with inefficiencies in the cash flow management, we analyze whether this evidence is due to expected returns which compensate investors for skewness exposure. Our empirical findings support this hypothesis. We implement different (co-)skewness measures proposed by the previous literature. We illustrate that diversified banks have asset returns with lower skewness, and, as a consequence of lower upside potential, investors demand for these stocks a higher discount or, vice versa, higher expected returns. Different robustness checks corroborate our main result.