Did Banks' Security Affiliates Add Value?: Evidence from the Commercial Banking Industry during the 1920s

This paper finds that banks' security affiliates added 4 percent to 7 percent to the market value of commercial banks in 1926 and 1927. This result is robust to the inclusion of a large array of control variables, including risk, regulatory environment, and financial health variables such as the capital-asset ratio and profitability measures. Bank size explains about 40 percent of this premium, thus suggesting that economies of scale were present. The remaining 60 percent of the premium most likely came from economies of scope. This result implies that the Glass-Steagall Act, by disallowing banks' involvement in the securities industry, had a direct cost in lost market value for the commercial banking industry.