September 2000
Lei Yu
ABSTRACT
The replacement of the 1933 Glass-Steagall Act by the Financial Services Modernization Act of 1999 offers a
unique opportunity for empirical analysis of the economic arguments concerning product diversification and consolidation
within the financial services industry. This paper analyses the stock price response of firms in the banking, securities,
and insurance industries to examine the wealth and risk effects of this deregulation. We find an increase in the
collective market value of financial services firms, while the magnitude of the wealth effects differ across industries
and size groups. Large securities firms, large insurance companies, and bank holding companies (BHCs) with pre-existing
subsidiaries operating in the securities business (section 20 subsidiaries), experienced significant increases
in the market value. This reflects market anticipation of gains from product diversification possibly arising from
cross-product synergies and the potential extension of "too big to fail" guarantees for the largest financial
services firms. We also find that the market accurately predicted the type of BHCs that would engage in product
expansion after the repeal.
Lei Yu
Institution: Stern School of Business, New York University
Email: lyu@stern.nyu.edu
Telephone: 212-998-0327
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