Inaugural lecture Prof. Knot: ‘One plus one equals one and a half: the valuation of financial conglomerates’

In his inaugural lecture on 6 March 2007, Klaas Knot, professor of Monetary and Banking Institutions at the Faculty of Economics, will discuss the ‘financial conglomerate discount’: the empirical observation that the shares of large financial conglomerates seem to be structurally undervalued. Although one would expect mixed conglomerates to be formed mainly to create added value generated by the combination of banking and insurance, this added value has thus far not been transferred to the shareholders.

Determining the added value of a financial conglomerate is essentially a cost-benefit analysis. To a large extent, the benefits of conglomerization are determined by the diversification of expected returns, cash flows or the concomitant risks. The costs mainly lie in the increased complexity of managing and controlling the various activities within the conglomerate.

First, Knot will provide a brief historical sketch of the phenomenon of conglomerization in Europe. He will then analyse the share price trends of the 45 largest listed financial conglomerates in relation to those of pure banks and pure insurance companies. He will conclude that mixed banking-insurance conglomerates are indeed slightly undervalued, although to a lesser extent than suggested by previous empirical research. He will identify three possible explanations for the undervaluation of financial conglomerates:
1) lower profitability of the institution as a whole caused by, for example, inefficient investment behaviour
2) lower dividends paid to shareholders due to a lower risk profile and thus also less chance of share price peaks
3) investors demanding higher returns due to their insufficient understanding of the business case of financial conglomerates.