The value relevance of product diversification in commercial banks

Abstract

PurposeThe purpose of this paper is to assess the value relevance of product diversification in US commercial banks.Design/methodology/approachThe paper examines differences in the value relevance of commercial bank earnings components from interest and noninterest banking activities. Specifically, it studies market reaction to changes in bank earnings from noninterest sources resulting from expansion into new financial services other than the traditional intermediation activities. A sample of commercial banks between 1993 and 2002 is used.FindingsResults show that annual abnormal returns have more significant positive relation with changes in the noninterest component of bank earnings compared with changes in the interest component of earnings. These results are more obvious for small banks and after 1999, the year in which the Gramm‐Leach‐Bliley Act allowed banks to expand into more noninterest banking activities.Originality/valueThis paper is an extension of the long and extensive accounting research strand in the value relevance of earnings applied to bank earning components. It may also contribute to banking and Finance literature regarding the effect of product diversification in the banking industry.