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On the Risk Situation of Financial Conglomerates : Does Diversification Matter?
Journal
Financial Markets and Portfolio Management
ISSN
1555-4961
ISSN-Digital
1555-497X
Type
journal article
Date Issued
2011-01-07
Author(s)
Abstract
In general, conglomeration leads to a diversification of risks (the diversification benefit)and to a decrease in shareholder value (the conglomerate discount). Diversification benefitsin financial conglomerates are typically derived without accounting for reducedshareholder value. However, a comprehensive analysis requires competitive conditionswithin the conglomerate, i.e., shareholders and debtholders should receive risk-adequatereturns on their investment. In this paper, we extend the literature by comparing the diversificationeffect in conglomerates with and without accounting for the altered shareholdervalue. We derive results for a holding company, a parent-subsidiary structure, andan integrated model. In addition, we consider different types of capital and risk transferinstruments in the parent-subsidiary model, including intra-group retrocession and guarantees.We conclude that under competitive conditions, diversification does not matter tothe extent frequently emphasized in the literature. The analysis aims to contribute to theongoing discussion on group solvency regulation and enterprise risk management
Language
English
Keywords
Financial conglomerate
Diversification
Risk-neutral valuation
Conglomerate discount
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Springer
Publisher place
US
Volume
25
Number
1
Start page
3
End page
26
Pages
24
Subject(s)
Division(s)
Eprints ID
70737