Activity-based diversification,corporate governance,and the market valuation of commercial banks in the Gulf Commercial Council |
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Authors: | Salim Chahine |
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Institution: | (1) The Suliman Olayan School of Business, American University of Beirut, 11-236, Beirut, Lebanon |
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Abstract: | This article examines the effect on market valuation of both corporate governance and the diversity of activities conducted
by GCC commercial banks. It shows evidence on the endogenous effect of corporate governance and the characteristics of the
banking industry in determining the diversification level of a bank. Empirical findings show a bias in results using ordinary
least squares regressions. When controlled for endogeneity, they indicate a negative (but weak) association between the diversification
index and the market valuation—consistent with the agency-based hypothesis. Interestingly, foreign banks and corporate shareholders
are effective monitors who invest in more diversified GCC banks with higher valuation multiples. Conversely, domestic corporate
shareholders—related by a complex web of relationships—invest in less diversified banks with a lower market valuation. In
addition, diversified commercial banks with either subsidiaries in developed countries or involvement in market-based activities
have higher market valuation. The latter may be explained by the effect on performance of the recent bubble in the Arab stock
market.
Dr. Salim Chahine
is a Associate Professor of Finance at the Suliman S. Olayan School of Business, the American University of Beirut (AUB),
Lebanon. He has a Ph.D in Finance from the University of Aix-Marseille III. His research is mainly in Initial Public Offerings,
Corporate Governance and Firm Valuation. He has several publications in international academic journals such as the Journal
of Business Finance and Accounting, the Journal of Small Business Management, the European Accounting Review, the International
Review of Financial Analysis, and the Journal Multinational Financial Management. |
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Keywords: | Corporate governance Diversification GCC commercial banks Market valuation Ownership structure |
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