Diversification and Firm Value:Evidence from Indian Banks

The paper utilizes data on domestically listed banks in India to examine the impact of diversification on firm value. Using data for the period 1997-2006, the results appear to suggest that diversity has a more perceptible impact on Tobin’s q as compared with excess value. This is apparent in simple univariate comparisons as well as in multivariate regression framework that take on broad a wide gamut of controls. In terms of magnitude, the findings indicate that a one standard deviation rise in income diversity lowers excess value of income by 0.04 standard deviation. In other words, banks tend to be more profitable when their income streams are widely spread over the income sources. Asset diversity, on the other hand, appears to exert no discernible impact on excess asset valuation.