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Internationalization, Performance and Volatility: The World Largest Financial Groups

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Abstract

The objective of this paper is to investigate the shape of the relationship between internationalization and performance of the world largest financial institutions. International diversification in several countries is expected to have a significant impact on the performance but also on the overall variability of the performance over time. The paper documents the relative importance of the largest financial groups in the world. The empirical analysis over the period 2003-2006 may have important implications for the structure of global financial markets. It suggests that performance considerations may limit the global consolidation of financial institutions if profitability decreases when size increases after a certain threshold. Furthermore, the ability to operate efficiently across borders appears to be linked to specialization rather than the nation of ownership or the size of the home market.

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Notes

  1. We use the term transnational in preference to multinational because our measures are based on the number of countries (host countries) in which companies operate. The term multinational implies some degree of globalization of activities in some key locations.

  2. See a survey by Martin and Sayrak (2003).

  3. A survey paper on business groups by Khanna and Yafeh (2007) examine this relationship.

  4. DeLong (2001) found that more value has been created through focussing mergers than diversifying mergers.

  5. Some studies have cast some doubt on the causal interpretation of the diversification discount. Diversification should take into account the firm-specific characteristics and management objectives that bear both on firm value and on the decision to diversify (Campa and Kedia, 2002).

  6. One exception is a paper by Schmid and Walter (2008).

  7. Hennart (2007) argues that there is no theoretical basis for expecting a systematic relationship between a firm's internationalization and its performance.

  8. The concept of eclectic or OLI paradigm (Ownership, Location, Internalization) was put forward by Dunning (1988, 1995) to identify and evaluate the significant factors explaining the activities of transnational companies.

  9. The role of knowledge acquisition costs relating to foreign expansion is treated explicitly in Johansson and Vahlne (1990).

  10. See Outreville (2007).

  11. According to the Wall Street Journal Market Data Group, the top 100 largest public financial companies amounted to $ 42 trillion in assets and the first 30 companies represented 60% of this total amount and the first 50 almost 77%.

  12. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which in June 1995 allowed nationwide interstate banking through holding company banks, and the Gramm-Leach-Bliley Act of 1999, which allowed cross-industry mergers between commercial banks and other financial institutions.

  13. Increased integration between banks, insurers, and financial funds is discussed in Van den Berghe et al. (1999). De Nicoló et al. (2004) document global internationalization trends in banking and conglomeration trends in large financial institutions worldwide.

  14. Attracted by the prospects of asset growth and risk diversification, foreign banks have expanded their business in developing countries through both M&As and direct investment in local markets (World Bank 2008)

  15. Due to data limitations it is extremely difficult to apply the Lang and Stulz (1994) chop-shop approach.

  16. Definition given by Worldscope and used by Thomson Financials and Fortune 500. Results by Elango et al. (2008) are supporting the use of ROA for insurance companies.

  17. This measure is an approximation of the Z-index based on accounting data and proposed by De Nicoló et al. (2004).

  18. However, the result that the increasing presence of foreign banks is associated with a reduction of domestic banks’ profitability is presented by Claessens et al. (2001).

  19. Several reports by UNCTAD, OECD, IMF and Eurostat give a definition of transnationality.

  20. For recent work based on multidimensional measures of internationalization see, for instance, Fisch and Oesterle (2003), Goerzen and Beamish (2003), UNCTAD (2007).

  21. UNCTAD (2006) defined the Geographical Spread Index (GSI) as the square root of the Internationalization Index (the number of foreign affiliates divided by the total number of affiliates) multiplied by the number of host countries.

  22. Typically, the estimation may also overestimate the benefits of DOI due to unobserved factors (management, corporate governance) and accounting practices (smoothing earnings for market, tax or regulatory reasons).

  23. Estimation with lagged dependent variables as instruments cannot be tested due to the limited number of observations.

  24. Negative relationship is consistent with the findings by Lee and Urrutia (1996).

  25. Data is extracted from Bloomberg market data.

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Authors and Affiliations

  1. HEC Montréal, University of Montréal, Montréal, Canada

    J. François Outreville

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  1. J. François Outreville
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Correspondence to J. François Outreville.

Additional information

Helpful comments by Stijn Claessens, Juan Dempere and participants at the annual Financial Services Symposium at St John’s University and seminars at HEC Montréal, Laval University and the University of Calgary are acknowledged. We thank Chantal Chan-Yone at HEC Montréal for research assistance.

Appendices

Appendix 1

Table 8 Largest Cross-border M&A deals in the financial sector, 2001-2007
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Appendix 2

Table 9 The Top 50 financial TNCs ranked by total assets, 2005
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Appendix 3

Table 10 Sample of the largest financial TNCs ranked by Geographical Spread Index, 2006
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Outreville, J.F. Internationalization, Performance and Volatility: The World Largest Financial Groups. J Financ Serv Res 38, 115–134 (2010). https://doi.org/10.1007/s10693-010-0090-7

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