Megamergers and Expanded Scope:  Theories of Bank Size and Activity Diversity

Todd T. Milbourn
Arnoud W. A. Boot
Anjan V. Thakor

         We point to the vast empirical literature in banking to argue that the current expansion of scale and scope in banking represents a puzzle.  We then present two explanations that help us to understand why banks are getting bigger and doing more.  Our explanations suggest that banks may be doing this to increase their shareholders' wealth and/or merely to enhance the reputation of their management (CEOs).  The latter could lead to herd behavior involving banks that increase size and scope despite a dissipation of shareholders' wealth.  Alternatively, increasing size and scope may offer strategic benefits (and hence increase shareholder wealth) in an environment with substantial uncertainty about future core competencies.  We explore conditions under which either one of these competing explanations may dominate. 

 Return to the Consolidation of the Financial Services Industry