The Valuation Effects of Geographic Diversification Evidence.pdfVIP

WP/12/50 The Valuation Effects of Geographic Diversification: Evidence from U.S. Banks Martin Goetz, Luc Laeven, and Ross Levine © 2012 International Monetary Fund WP/ 12/50 IMF Working Paper Research Department The Valuation Effects of Geographic Diversification: Evidence from U.S. Banks Prepared by Martin Goetz, Luc Laeven, and Ross Levine1 Authorized for distribution by Stijn Claessens February 2012 This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Abstract This paper assesses the impact of the geographic diversification of bank holding company (BHC) assets across the United States on their market valuations. Using two novel identification strategies based on the dynamic process of interstate bank deregulation, we find that exogenous increases in geographic diversity reduce BHC valuations. These findings are consistent with the view that geographic diversity makes it more difficult for shareholders and creditors to monitor firm executives, allowing corporate insiders to extract larger private benefits from firms. JEL Classification Numbers:G34; L22; G21; G24 Keywords: Geographic Corporate diversification; Agency problems; Economies of scope; Corporate insiders; Corporate valuation Author’s E-Mail Address: martin.goetz@; llaeven@; ross_levine@ 1 Goetz: Federa