On the Risk Situation of Financial Conglomerates: Does Diversification Matter?
Gatzert N, Schmeiser H (2011)
Publication Language: English
Publication Type: Journal article, Original article
Publication year: 2011
Journal
Publisher: Springer Verlag
Book Volume: 25
Pages Range: 3-26
Journal Issue: 1
DOI: 10.1007/s11408-010-0149-3
Abstract
In general, conglomeration leads to diversification of risk (the diversification benefit) and a decrease in shareholder value (the conglomerate discount). Diversification benefits in financial conglomerates are typically derived without explicitly accounting for reduced shareholder value. However, a comprehensive analysis requires competitive conditions within the conglomerate, i.e., shareholders and debt holders should receive risk-adequate returns on their investment. In this paper, we contribute to the literature on this topic by comparing the diversification effect in conglomerates with and without accounting for altered shareholder value. We derive results for a holding company, a parent-subsidiary structure, and an integrated model. In addition, we consider different types of capital and risk transfer instruments in the parent-subsidiary model, including intragroup retrocession and guarantees. We conclude that under competitive conditions, diversification does not matter to the extent frequently emphasized in the literature. The analysis contributes to the ongoing discussion on group solvency regulation and enterprise risk management, which is of relevance to insurance groups and other financial conglomerates. © 2011 Swiss Society for Financial Market Research.
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APA:
Gatzert, N., & Schmeiser, H. (2011). On the Risk Situation of Financial Conglomerates: Does Diversification Matter? Financial Markets and Portfolio Management, 25(1), 3-26. https://doi.org/10.1007/s11408-010-0149-3
MLA:
Gatzert, Nadine, and Hato Schmeiser. "On the Risk Situation of Financial Conglomerates: Does Diversification Matter?" Financial Markets and Portfolio Management 25.1 (2011): 3-26.
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