The Valuation Effects of Geographic Diversification: Evidence From U.S. Banks

Abstract

This paper assesses the impact of the geographic diversification of bank holding company (BHC) assets across the United States on (1) their market valuations and (2) the generosity of their loans to bank executives. We find that exogenous increases in geographic diversity reduce BHC valuations and increase the frequency and size of insider loans. These findings are consistent with the view that geographic diversity makes it more difficult for shareholders and creditors to monitor bank executives, allowing corporate insiders to extract larger private benefits from controlling complex BHCs.