Nadia Saghi-Zedek

Jean-Bernard Chatelain

Simon Cornee

Robert Deyoung

Jessica Fouilloux

Iftekhar Hasan

Kose John

Laetitia Lepetit

Franck Moraux

Patrick Navatte

Alain Sauviat

Amine Tarazi

Jean-Laurent Viviani

Product diversification and bank performance: does ownership structure matter?

Keywords: JEL Classification: G21, G28 ownership structure, product diversification, performance, European banking

Using detailed data on control chains of 710 European commercial banks, we test whether the presence of some categories of controlling shareholders affects product diversification performance. We find that when banks have no controlling shareholder or have only family and state shareholders activity diversification yields diseconomies. However, as long as the control chain involves banking institutions, institutional investors, industrial companies or any other combination of these shareholder categories, banks benefit from diversification economies: they display higher profitability, lower earnings volatility and lower default risk. This is potentially because such categories of shareholders bring additional skills to manage diverse activities. A further exploration shows that such mitigating roles are greater for domestic and diversified shareholders. Our findings provide insights on why banks suffer from greater activity diversification and have several policy implications.

Introduction

The question of whether policy makers should restrict banking activities or allow banks to engage in diverse activities is still a debatable policy issue. Although the effect of greater activity diversification (i.e., a combination of traditional and nontraditional activities) on banks' performance (profitability and risk) is well addressed in the literature, there is no consensus thus far, with evidence showing the presence of economies and diseconomies of diversification. These inconclusive findings cry out for a further investigation to learn why banks suffer or benefit from their diversification strategy. The objective of this paper is therefore to test whether diversification performance depends on the bank's organizational aspect, and especially its ownership structure. More specifically, we test whether banks involving in their ownership structures shareholders with prior experience in managing a variety of activities are better able to reap benefits of activity diversification.

In some countries -such as in Europe-banks and firms are not stand-alone but, rather, they belong to a group of firms linked via strong shareholding relationships. In such ownership settings, a shareholder achieves the control of a specific bank through a large number of intermediate corporations: a shareholder directly controls a firm, which in turn controls another firm, which might itself control another firm, and so forth.1 Within these multilayer ownership structures, several shareholders of different categories are involved in the bank's decision making: banking institutions, institutional investors (mutual funds, financial companies and insurance companies), industrial companies, families and so forth. This set of shareholders could actually provide the bank an initial exposure and background and therefore sufficient ability and expertise to easily diversify. For instance, institutional investors are known to have prior experience in loans syndication [START_REF] Lim | Syndicated loan spreads and the composition of the syndicate[END_REF], securities and insurance underwriting, brokerage and mutual fund activities and, as a consequence, they are able to deliver additional skills and expertise allowing the bank to reap benefits accruing from activity diversification.

More precisely, in this paper we assume that some categories of controlling shareholders, like institutional investors, banking institutions and industrial companies could be a source of advanced techniques, expertise and knowledge allowing banks to manage diverse activities where they potentially lack experience. Hence, banks with a significant presence of these shareholder categories could diversify more promptly than widely-held banks (i.e., banks with no controlling shareholder) and enjoy economies of activity diversification.

To investigate the role of certain shareholder categories in mitigating diseconomies of diversification, we use a hand-collected data on multilayer ownership structures (i.e., control chains) of 710 commercial banks based in 17 Western European countries where the presence of multilayer ownership structures is more important than in other Western countries. We identify all shareholders involved in the bank's control chain and classify them into five categories: banking institutions, institutional investors, industrial companies, families and states. We then test whether the presence of some of these controlling shareholders could shape diversification performance by potentially affecting banks' expertise in managing their activities over the 2002-2010 period. Banks can diversify into new non-interest or interest income products or to services that are directly linked to an existing activity. Banks can also diversify within either non-interest income or interest income generating activities. We hence consider banks' activity diversification that occur either through shifts between non-interest income and interest income generating activities or through diversification within non-interest income generating activities. We capture banks' performance using profitability, earnings volatility and insolvency measures based on accounting data but also on market data.

We find that diversification performance differs according to the categories of shareholders involved in the bank's control chain. More precisely, the results show that activity diversification is associated with higher earnings volatility and higher default risk when banks are widely-held or have only families and states as controlling shareholders. This is possibly because families and states lack experience to manage diverse activities and, as a consequence, they are unable to deliver skills to their banks to allow for a successful activity diversification. However, banks involving as controlling shareholders other banking institutions, institutional investors and industrial companies benefit from diversification economies, meaning that they enjoy higher profitability and exhibit lower earnings volatility and insolvency. Consistent with our conjecture, these results suggest that, unlike family and state owners, the presence of institutional investors, banking institutions as well as industrial companies in banks' control chains is a source of additional skills and expertise allowing banks to reap the benefits from more diverse activities.

We also take our investigation further and examine whether the effectiveness of these controlling shareholders in mitigating diseconomies of diversification is more or less pronounced under particular conditions. Consistent with the home field advantage view (e.g., [START_REF] Lensink | Does foreign ownership foster bank performance?[END_REF], we find that the observed mitigating roles are greater for domestic owners than for foreign ones. The results also show that, as long as the bank is controlled by a single ultimate owner, intermediate controlling shareholders are effective in mitigating diseconomies of diversification regardless of the extent of their financial interests held in the bank. This is consistent with our conjecture that an ultimate owner, when she/he is the only one who lastly benefit from a successful diversification, should have greater incentives to encourage intermediate shareholders to cooperate and transmit their skills to banks. Moreover, the results show that diversified owners are more efficient in mitigating diseconomies of diversification. Finally, we find that, although both large and small banks benefit from the presence of those shareholders, diversification benefits are greater for small banks. This is consistent with the view that small banks may suffer more from the lack of expertise to manage diverse activities (e.g., [START_REF] Mercieca | Small European banks: Benefits from diversification[END_REF] and, as a consequence, they should benefit more from the technology transmitted by controlling shareholders.

This study contributes to the literature in three directions. Firstly, our paper builds a bridge between the bank's organizational aspect and diversification performance within complex shareholding relationships by analyzing whether banks controlled by certain categories of shareholders are better able to benefit from their diversification strategy. Secondly, our study uses a broader dataset on multilayer ownership structures and adds to the literature by constructing several ownership indicators. Thirdly, our paper focuses on why banks suffer or benefit from their diversification strategy and sheds light on the fact that diseconomies of diversification in European banks come, at least partially, from the lack of expertise in managing diverse activities. From a policy perspective, this finding may be of help in the discussion of policy recommendations with regards to more stringent activity restrictions in European countries (IMF, 2011;ICB, 2011;[START_REF] Liikanen | High-level Expert Group on reforming the structure of the EU banking sector[END_REF].

The remainder of the paper is organized as follows. Section 2 discusses the relevant literature and Section 3 presents the data and the model. In Section 4, we present the sample characteristics and some univariate analyses. Section 5 discusses the regression results and Section 6 concludes the paper.

Related literature and hypotheses development

Over the last three decades, banks have expanded their income sources by undertaking non-interest income generating activities such as securities and insurance underwriting, brokerage and mutual fund services, venture capital and asset securitization. The existing literature testing the implications of activity diversification on banks' profitability and risk provides inconclusive findings.

Most studies dedicated to the U.S. banking industry find that greater involvement in noninterest activities leads to higher profitability but also to higher risk because of the increased volatility of these activities. For instance, [START_REF] Deyoung | Product mix and earnings volatility at commercial banks: Evidence from a degree of total leverage model[END_REF], [START_REF] Stiroh | Diversification in banking: Is non-interest income the answer?[END_REF], and [START_REF] Stiroh | The dark side of diversification: The case of US financial holding companies[END_REF] find that a shift towards non-interest activities worsens the riskreturn trade-off. In a recent study, [START_REF] Deyoung | Non-traditional banking activities and bank failures during the financial crisis[END_REF] find that expansion to nontraditional activities affected the probability of U.S. banks failure during the financial crisis and that this effect depends on banks' financial conditions. Specifically, they show that higher involvement in nontraditional activities is associated with higher probability of failure for financially distressed banks and the opposite is the case for healthy banks. Conversely, some U.S. based studies show that banks have potential benefits to expand the scope of their activities. For instance, [START_REF] Gallo | Commercial bank mutual fund activities: Implications for bank risk and profitability[END_REF] find that at some extent combining bank and mutual fund activities improves profitability and reduces risk of U.S. bank holdings companies over the 1987-1994 period.

Similarly, studies based on European banks provide conflicting results regarding the effect of diversification on bank performance. [START_REF] Mercieca | Small European banks: Benefits from diversification[END_REF] find that small European banks do not gain from their diversification strategy; the share of non-interest income is inversely related to profitability and positively to risk implying lower risk-adjusted returns. The authors explain such a finding by a lack of expertise of small banks in managing new lines of business and diverse activities. [START_REF] Lepetit | Bank income structure and risk: An empirical analysis of European banks[END_REF] find that European banks expanding into noninterest income generating activities display higher risk and higher insolvency. This finding is mainly attributed to small banks and is essentially driven by commission and fee-based activities. Analyzing the effect of diversification on systemic risk of European banks, De Jonghe (2010) finds that non-interest generating activities increase banks' tail beta, reducing banking system stability.

Conversely, [START_REF] Vennet | Cost and profit efficiency of financial conglomerates and universal banks in Europe[END_REF] investigates the cost and profit efficiency of European banks and finds that financial conglomerates display better cost and profit efficiencies than focused banks. Similarly, [START_REF] Baele | Does the stock market value bank diversification[END_REF] find that activity diversification is associated with higher franchise values and lower idiosyncratic risk for a sample of banks established in 17 Western European countries over the period 1989[START_REF] Stiroh | Diversification in banking: Is non-interest income the answer?[END_REF]. Analyzing Italian banks, Chiorazzo et al. (2008) show that greater activity diversification improves the risk-return trade-off and that such diversification gains are stronger for large banks.

Besides, some recent studies on emerging markets show that diversification effects on the risk-return trade-off are mainly driven by differences in ownership structures, with still contrasting results. [START_REF] Berger | The effects of focus versus diversification on bank performance: Evidence from Chinese banks[END_REF] find evidence of a diversification discount for a sample of Chinese banks over the 1996-2006 period and show that this discount is stronger for domestic banks than for foreign ones. The authors explain this diversification discount by the shortage of managerial expertise of the management teams. Similarly, [START_REF] Pennathur | Income diversification and risk: Does ownership matter? An empirical examination of Indian banks[END_REF] examine the impact of ownership structure on income diversification and risk for Indian banks over the 2001-2009 period. They find that public sector banks are significantly less involved in non-interest activities. They also document that a shift to fee-based activities benefits public sector banks by reducing risk and default risk but the opposite is the case for both private domestic and foreign banks. In the case of Philippine banks, [START_REF] Meslier | Is bank income diversification beneficial? Evidence from an emerging economy[END_REF] find that income diversification improves profitability and risk-adjusted profitability. Such diversification economies are significantly stronger for foreign banks than domestic ones.

In this paper, we aim to test whether banks controlled by certain categories of shareholders are better able to reap benefits of activity diversification than banks with dispersed ownership (i.e., widely-held banks). Some categories of shareholders have expertise in managing various activities and could bring additional experience, allowing the bank to easily diversify. For instance, institutional investors are generally larger, hold sufficiently diversified portfolios and have expertise in processing information at a lower cost [START_REF] Pound | Proxy contests and the efficiency of shareholder oversight[END_REF]. Institutional investors are also generally involved in term and riskier syndicated loans [START_REF] Lim | Syndicated loan spreads and the composition of the syndicate[END_REF] and therefore have a habit to manage riskier activities. Moreover, as suggested by some earlier works (e.g., [START_REF] Diamond | Monitoring and reputation: the choice between bank loans and directly placed debt[END_REF][START_REF] Rajan | Insiders and outsiders: the choice between informed and arm's-length debt[END_REF], banking institutions acquire valuable information about clients during the process of making loans that facilitates the efficient provision of other financial services such as the underwriting of securities, and vice versa. Similarly, industrial companies might hold sufficiently diversified asset portfolios [START_REF] Barry | Ownership structure and risk in publicly held and privately owned banks[END_REF]. As major shareholders in some countries (like in Europe), industrial companies could also play an important role in governing banks and acquiring valuable information. Taken together, these arguments suggest that, as controlling shareholders, banking institutions, institutional investors and industrial companies can transmit the acquired information to their banks to manage diverse activities where the latter potentially lack experience. We hence test the following hypothesis: Hypothesis 1. A shift from dispersed ownership to these categories of shareholders (i.e., banks, institutional investors and industrial companies) or any combination of these should improve the diversification performance.

In contrast, other shareholders (like families) limit executive management positions to family members which might restrict labor pool to obtain qualified talent. Families and states could also see innovation and openness as potential threats to their control and might be reluctant to finance innovations [START_REF] Morck | Inherited wealth, corporate control and economic growth: The Canadian disease[END_REF]. This suggests that compared to the remaining categories of shareholders, family and state shareholders might be less effective in delivering managerial expertise beyond the existing one. Hence, we also test the following hypothesis: Hypothesis 2. A shift from dispersed ownership to family or state ownership may not result in a more successful diversification strategy.

Data and model

Before presenting the empirical model and the set of variables, we describe the sample.

Sample

Our sample contains commercial banks established in 17 Western European countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

The sample period is from 2002 to 2010. We obtain bank accounting data from Bankscope.

We mostly use unconsolidated data if available, otherwise we employ consolidated data. We check the robustness of the results using only unconsolidated data. To retrieve ownership data, we use both Bankscope and Amadeus databases as key sources, but also the annual reports disclosed in the websites. We collect macroeconomic data from the Bloomberg database. To be able to correctly calculate rolling-window standard deviations of our risk indicators, we restrict the initial sample to banks for which we have detailed information on the main financial variables for at least three years of time series observations. We mitigate the impact of outliers by winsorizing the main financial variables at the 1% and 99% levels.

This gives rise to a final sample of 4,615 annual observations corresponding to 710 commercial banks, 105 of which are listed banks (see Table 1 for a classification of these banks by country). To assess the representativeness of the final sample, we compare the aggregate total assets of the sample banks in a given country with the aggregate assets of all the banks covered by Bankscope in the same country over the 2002-2010 period. The mean data coverage of the final sample lies at almost 80%.

[Insert Table 1 about here]

Model specification and variables

To test Hypotheses 1 and 2, we estimate the following dynamic model (e.g., [START_REF] Sanya | Can banks in Emerging Economies benefit from revenue diversification[END_REF][START_REF] Wintoki | Endogeneity and the dynamics of internal corporate governance[END_REF] including a set of control variables (X) as well as vectors of country (Country) and year (Year) dummies:

(1) where, y is a measure of bank performance (profitability and risk); Diversity is a measure of activity diversification; d(Category j ) is a set of dummy variables which capture the presence of each of the five categories of shareholders we consider: banks, institutional investors, industries, families, or states; are bank fixed effects; and is the error term.

The coefficient measures the effect of greater activity diversification on the performance of widely-held banks. Widely-held banks are used as a benchmark against which we analyze whether a shift from dispersed ownership to a given category of shareholders (banks, institutional investors, industries, families, or states) or to any combination of these categories of shareholders results in an increase of economies of diversification or a decrease in diseconomies of diversification. Hence, the coefficients measure the effect on diversification performance of a shift from banks with dispersed ownership to banks having as controlling shareholders other banking institutions, institutional investors, industrial companies, family investors, or states. More precisely, the test of Hypothesis 1 is provided by the coefficients , and as well as by their sum, while the test of Hypothesis 2 is provided by the coefficients and and their sum.

We now turn to the description of the main variables introduced in our regressions (see Table 2 for summary statistics and more details on these variables).

Measuring ownership structure

To identify all shareholders involved in the bank's decision making, we first need to build indirect control chains of the sampled banks until we achieve their ultimate controlling owners. To identify each owner along the control chains, we fix a minimum percentage of shares above which the owner can exert effective control over the intermediate and the final corporations involved in the control chain. Following prior studies (e.g., [START_REF] Caprio | Governance and bank valuation[END_REF]Laeven andLevine, 2008, 2009) We also use the control chains to assess control rights (i. (e.g., [START_REF] Claessens | The separation of ownership and control in East Asian corporations[END_REF][START_REF] Faccio | The ultimate ownership of Western European corporations[END_REF] under which indirect control rights are equal to the minimum percentage of shares held in the indirect control chain. Indirect cashflow rights are calculated as the product of the percentages of shares held by the shareholders along the indirect control chain linking the shareholder s to the bank i. We set aggregate control rights and aggregate cash-flow rights equal to zero if the bank is widely-held.

The incentives of controlling shareholders to transmit their skills to the bank to easily diversify may increase with the extent of their financial interests in the bank. To capture such incentives, we compute an ownership indicator CFRConcentration which takes into account the level and the dispersion of financial interests among all shareholders in the control chain:

CFRConcentration i = CFR i × (1 -SDCFR i ), (2)
where, CFR i and SDCFR i are respectively the average and the standard deviation of cash-flow rights held by all the shareholders involved in the control chain of bank i. 4 More formally, CFR i and SDCFR i are respectively computed as CFR s, i and SDCFR i CFR s, i , with n refers to the number of shareholders in the control chain. If the bank is widely-held, we set CFR i equal to zero and therefore the variable CFRConcentration is null too. Higher values of CFRConcentration indicate a higher likelihood that all shareholders cooperate to transmit their skills to the bank to allow for a successful diversification strategy.

Moreover, the ability of a shareholder to transmit skills and to influence the bank's decision making might also matter. We hence follow the same procedure and compute another

indicator CRConcentration based on the control rights of all shareholders.5 Higher values of CRConcentration indicate higher ability of shareholders to transfer their skills, if any, to the bank and to influence its decision making. (1 -0.10) = 10.09%. We follow the same procedure to compute

CRConcentration. Control rights of each shareholder are:

CR 1 (S1) = CR 2 (S2) = 20%; CR 3 (S3) = 50%; CR 4 (S4) = CR 5 (S5) = CR 6 (S6) = 20%; CR 7 (S7) = CR 8 (S8) = CR 9 (S9) = 15%. 12 CR = 1 9 CR s = 9 s=1
21.66%. CR s . CRConcentration is then computed as:

21.66% (1 -0.11) = 19.28%.

[Insert Fig. 1 about here]

Performance, product diversification and control variables

We use various accounting-based indicators to assess bank performance (profitability and risk). We measure profitability for each bank using the return on assets computed as the ratio of net income to total assets (ROA). We use the return on assets rather than the return on equity (ROE) in order not to have our main results contaminated by differences in the leverage ratio. As a measure of bank risk-taking, we use the standard deviation of the return on assets (SDROA) which we compute on a rolling-window of three years ([t-2, t]), but also on a rolling-window of five years ([t-4, t]) for robustness considerations. Higher values of SDROA indicate higher risk-taking. We also compute a risk-adjusted profitability measure (RAROA) which we define as the ratio of the return on assets to its three-year rolling-window standard deviation. Finally, we consider a measure of default risk for each bank by computing the Z-Score (ZScore) following [START_REF] Boyd | Risk, regulation, and bank holding company expansion into non-banking[END_REF] as: ZScore = (ROA+ Equity)/SDROA, where Equity is the ratio of total equity to total assets. Lower values of both RAROA and ZScore denote respectively a higher risk and a higher probability of failure. 6

We capture the degree of product diversification using bank income structure. Ideally, we would like a detailed breakdown on bank income and data on the extent to which banks underwrite securities, operate mutual funds, securitize assets, provide brokerage services, and so on. These details allow us to accurately test the effect of the presence of some categories of shareholders in the control chain on diversification performance. Data availability, however, restricts our ability to measure the diversification of activities for both publicly-listed and privately-owned banks. Given this data constraint, we use two diversification measures. The first measure referred to as Income Diversity captures the degree of diversification between interest and non-interest generating activities:

6 Besides the use of accounting performance measures, to check the robustness of the results we also compute several marketbased indicators for the subsample of 105 publicly-listed banks. We consider a profitability measure (Return) defined as the average of daily bank stock returns for a calendar year. Risk-taking is defined as the standard deviation of daily bank stock returns for a calendar year (SDReturn). We measure default risk using two indicators: (i) a market data based ZScore defined as:

, where Return and SDReturn are in percentages and (ii) the Merton's distance to default (DD). We compute the Merton's distance to default using both accounting and market variables: (i) debt of one year maturity which we interpolate using the cubic spline method to get daily observations, (ii) daily market value of equity and (iii) the three-month interbank risk-free rate. The estimation results obtained using market-based measures, not reported here but available on request, lead to similar conclusions. We introduce in the regressions a set of control variables that are highlighted by the existing literature to affect bank performance: the divergence between control and cash-flow rights (ExcessControl) defined as the difference between aggregate control rights and cash-flow rights of the largest ultimate owner (i.e., the one with the highest aggregate control rights); the natural logarithm of bank total assets [Log(Assets)] to account for bank size; the ratio of equity to total assets (Equity) to control for bank capitalization; the ratio of deposits to total assets (Deposits) to account for the funding structure; the ratio of loans to total assets (Loans) to control for the bank business model; a dummy variable d(Listed) to account for the public and private status of banks; and finally the growth rate of the real gross domestic product (GDPGrowth) to take into account differences in the macroeconomic environment.

[Insert Table 2 about here]

Sample characteristics and univariate analyses

We first present the ownership characteristics of the sample banks. Then, we look into the diversification performance of banks classified according to the categories of shareholders they involve in their control chains.9

Ownership characteristics of banks in Western Europe

Our dataset indicates that around 13% of the observations relate to widely-held banks and 87% to banks that are controlled by at least one shareholder. The number of shareholders involved in the control chains of banks ranges from one to 64. Among controlled banks, more than 90% of the observations relate to banks with at least two shareholders in their control chains. 10 We report in Table 3 information on the distribution of the sample according to the composition of banks' control chains. The table shows that other banking institutions and institutional investors are strongly involved in our sample both as intermediate and ultimate controlling shareholders. Some of the banking shareholders coincide with publicly-listed banks that are present in our sample. For instance, the Deutsche Bank AG which is the largest bank in our sample appears also as an ultimate controlling owner of a number of other banks in the sample. Individuals/families (Family) and states (State) are evenly present as intermediate and ultimate owners of banks. In contrast, industrial companies (Industry) are frequent as intermediate shareholders but less present as ultimate controlling owners.

Banks' ownership structure might at some extent change over time. To be able to examine variations in ownership structure, we restrict the sample to 400 controlled banks for which we have information for at least two years for which ownership is available, i.e. 2004, 2006 and 2010. Overall, the data show that the ownership structure of European banks is stable over time: 85% of the observations relate to banks for which the composition of the control chain remains unchanged over the sample period. Among the 400 banks we identify, ownership structure changed over time for only 45 banks. Unlike other shareholder categories, family ownership is generally stable. While the average institutional ownership has increased mainly during the first half of the sample period (2004)(2005)(2006), the presence of banking institutions and industrial companies has decreased during the same period. State ownership also experienced a significant increase especially during the 2006-2010 and 2004-2010 periods. A possible explanation is the fact that a large part of state ownership may have come from massive government intervention by capital injections or nationalizations during the 2008 financial crisis. This increase in state ownership explains partly why the proportion of state owners in our sample is quite higher (around 10%) compared with previous studies (e.g., [START_REF] Faccio | The ultimate ownership of Western European corporations[END_REF][START_REF] Caprio | Governance and bank valuation[END_REF].

Ownership structure, product diversification and performance

We first examine whether banks with different categories of shareholders exhibit differences in the extent to which they are diversified. The results (not tabulated) show that banks in the sample are relatively diversified among interest and non-interest activities but focused within the range of non-interest activities: most of non-interest income comes from commissions and fee-based activities rather than from trading activities. The data also show that the degree of bank diversification is not significantly different among all groups of banks classified according to the categories of shareholders. These sample characteristics allow us to correctly test our hypotheses.

We then analyze whether the diversification performance differs depending on the composition of the banks control chains. On the whole, considering the Income Diversity measure, the results in Table 4 show that unlike for other banks, activity diversification is associated with higher profitability and lower risk when banks involve institutional investors, banking institutions, and industrial companies as shareholders in their control chains. A possible explanation could be the involvement of those powerful shareholders with prior experience in managing a variety of activities and their strong association with better financial networks and partnerships. The results obtained using the Noninterest Income Diversity measure (not reported in Table 4) show almost similar characteristics.

Econometric results

In this section, we first examine whether banks benefit or suffer from their diversification strategy regardless of their ownership structure. We then analyze whether banks controlled by certain categories of shareholders are better able to reap the benefits of diversification than widely-held banks. We finally look more closely into the factors that might affect the effectiveness of such controlling shareholders in mitigating diseconomies of diversification.

We use the [START_REF] Blundell | Initial conditions and moment restrictions in dynamic panel data models[END_REF] Generalized Method of Moments (GMM) to estimate the coefficients of the dynamic fixed effects model reported in Eq. (1). Banks' expansion into new activities is not exogenous because banks that perform better are able to choose specific diversification strategies meaning that causality may run from performance to diversification (e.g., [START_REF] Berger | The effects of focus versus diversification on bank performance: Evidence from Chinese banks[END_REF]. Similarly, previous studies (e.g., [START_REF] Demsetz | The structure of corporate ownership: Causes and consequences[END_REF][START_REF] Almeida | The structure and formation of business groups: Evidence from Korean chaebols[END_REF] indicate that ownership may be endogenous as it is affected by the firm's level of performance (profitability and risk). However, as explained before, in our case ownership is stable over the sample period and therefore causality should only run from ownership to bank performance [START_REF] Chi | Understanding the endogeneity between firm value and shareholder rights[END_REF]. Furthermore, most of control variables are potentially endogenous. For instance, banks' size and capitalisation as well as their public/private status could depend on banks' performance. We hence apply GMM instruments (lagged values) to all independent variables except for time, country and ownership dummies as well as GDP growth that we consider as exogenous. We limit the number of instruments by restricting the lag range used to generate them to three. We check the validity of these instruments using the Hansen test (an over-identification test under the null that all instruments are valid) and the Arellano and Bond test for the absence of second order residual autocorrelation (AR2 test). We also ensure the absence of multicolinearity problems by computing the variance inflation factors (VIF), which have a mean value of 1.25 with a maximum of 1.92 and a minimum of 1.02.

Product diversification performance: baseline results

As explained before, the literature highlights that activity diversification does not necessarily imply higher profitability and lower risk, but may on the contrary induce diseconomies. Therefore, as a first check we test the effect of activity diversification on banks' performance regardless of their ownership structure to shed light on whether European banks benefit or suffer from their diversification strategy. Table 5 reports the obtained results using income (Panel 1) and non-interest income (Panel 2) diversity measures. We find that both diversity measures are associated with higher profitability but also with higher risktaking and higher default risk, and this holds in almost all the regressions: the coefficient on the diversity measure is significant and positive for the profitability (ROA) and the risk-taking (SDROA) proxies and negative for the default risk proxy (ZScore). Furthermore, the results indicate that the benefits accruing from activity diversification (i.e., the positive effect on profitability) do not outweigh the increase in earnings volatility (SDROA): the coefficient associated to the diversity measure is not significant in the regression where the dependent variable is risk-adjusted profitability (RAROA).

While these findings challenge the traditional intermediation theory [START_REF] Diamond | Financial intermediation and delegated monitoring[END_REF] which suggests that diversification reduces risk, they are aligned with the findings of some earlier works indicating that diversification gives rise to diseconomies. For instance, [START_REF] Laeven | Is there a diversification discount in financial conglomerates[END_REF] explain the diseconomies of diversification by agency problems between managers and shareholders. Other studies highlight that the diseconomies of diversification could be due to the fact that banks have less experience to manage diverse activities and this ultimately harms performance, reflected in more volatile earnings and higher insolvency risk (e.g., [START_REF] Mercieca | Small European banks: Benefits from diversification[END_REF]. In any case, taken together, our results imply that banks in Europe suffer diversification diseconomies (i.e., higher risk).

Regarding control variables, some of them enter significant. Consistent with the expropriation effect (e.g., [START_REF] Azofra | Ownership, control, and pyramids in Spanish commercial banks[END_REF]Santamaria 2011, Saghi-Zedek and[START_REF] Saghi-Zedek | Excess control rights, financial crisis and bank profitability and risk[END_REF] we find that the divergence between control and cash-flow rights (ExcessControl) is associated with lower profitability, higher risk-taking and higher default risk. However, the dummy variables included to account for the types of shareholders in the control chain are generally non-significant. The results also show that large banks are more profitable (higher ROA) than small banks but they also display a higher probability of failure (lower ZScore). In addition, better capitalized banks are more profitable (higher ROA) and less vulnerable (higher ZScore) but more risky (higher SDROA). Moreover, the results show that banks with larger deposit base are more profitable and exhibit a higher probability of failure. In contrast, banks more reliant on lending activities are less risky. Finally, the results show that the annual growth rate of the gross domestic product is positively related to profitability and negatively to risk.

[Insert Table 5 about here]

If the observed diseconomies of diversification (higher risk) are due, at least partially, to the lack of expertise of European banks to manage diverse activities, the presence of controlling shareholders with prior experience in managing some activities could help to mitigate such diseconomies. Our objective in the next subsection is therefore to test whether European banks controlled by certain categories of shareholders are better able to extract the benefits of activity diversification.

Ownership structure and banks' diversification performance

Table 6 reports the results of estimating the coefficients of Eq. (1) using income (Panel 1) and non-interest income (Panel 2) diversity measures for the sample banks over the 2002-2010 period. 11 The results show that widely-held banks display higher profitability but also higher risk: the coefficient is significant and positive for the profitability (ROA) and the risk-taking (SDROA) proxies and negative for the default risk proxy (ZScore), and this holds in almost all the regressions irrespective of the diversity measure we consider. Consistent with Hypothesis 2, the results also show that neither family nor state controlling shareholders affect diversification performance: the coefficients and are not significant in all the regressions. This suggests that diversification performance is not different between widelyheld banks and banks for which the control chains include only family and/or state owners.

However, consistent with Hypothesis 1, the results show that banking institutions, institutional investors and industrial companies, as shareholders involved in the control chains, help to mitigate diseconomies of diversification: the coefficients , and are significant in almost all the regressions and positive when the dependent variable is a profitability (ROA and RAROA) or a default risk proxy (ZScore), and negative when we consider a risk-taking proxy (SDROA). Coherently, the coefficient associated to the variable d(Industry) Diversity is generally significant only at the 10% level and it is smaller in magnitude compared to the coefficients and associated respectively to d(Bank) Diversity and d(Institutional) Diversity. This means that industrial companies are less effective in mitigating diseconomies of diversification compared to banking institutions and institutional investors. Overall, the results show that when the control chain is composed of banking institutions, institutional owners, or industrial companies or any combination of these shareholder categories, activity diversification leads to higher profitability, less volatile earnings and lower default risk.

To examine the effect of the shareholder categories on banks' diversification performance, we compute the marginal effects from Eq. (1) as: . For instance, the parameters and measure the effect of activity diversification on the performance of banks having only institutional investors and banks having all categories of shareholders in their control chains, respectively. To save space, we report in the table only the marginal effects on the main combinations of shareholder categories.

Our results are not only statistically significant but also economically meaningful. For instance (see Table 6), the regression where SDROA is the dependent variable suggests that risk will increase by almost 8% of its mean (from 0.47% to 0.50%) if there is a one standard deviation increase in Income Diversity (12.41%) when the bank is widely-held [i.e., when the five dummy variables d(Category) are simultaneously equal to zero]. For the same increase in Income Diversity, bank risk will increase by almost 11% (from 0.47% to around 0.52%) of its mean if the control chain includes family and/or state owners solely. But for such an increase in Income Diversity, risk falls by almost 11% of its mean (from 0.47% to 0.42%) when the bank belongs to a control chain which is fully composed of institutional investors and by almost 8% of its mean (from 0.47% to 0.43%) when the control chain has entirely banking institutions. 12 For control chains composed of industrial companies solely, the effect of diversification on risk (SDROA) is not significant ( non-significant), confirming the intuition that industrial companies are effective in mitigating diseconomies of diversification but at a lesser extent compared to banking institutions and institutional investors. For such an increase in Income Diversity, bank risk decreases by almost 27% of its mean when the control chain includes the five categories of shareholders (from 0.47% to around 0.35%).

[Insert Table 6 about here]

On the whole, our results suggest that the effect of activity diversification on performance depends on the presence and absence of some shareholder categories in the control chain to which the bank belongs. More precisely, banks suffer diseconomies of diversification (i.e., higher risk) when they are widely-held or when their control chains include family and/or state owners solely. However, when control chains involve banking institutions, institutional investors, industrial companies or any other combination of these categories of controlling shareholders, banks benefit from diversification economies (higher profitability, lower earnings volatility and lower default risk). These results are consistent with the expertise of institutional investors, banking institutions and industrial companies in managing some activities, which if, transferred to the bank can translate into better diversification performance.

Ownership structure and banks' diversification performance: deeper investigations

In this subsection, we go further by analyzing some factors that could reinforce or weaken the effectiveness of controlling owners in mitigating diseconomies of activity diversification.

We consider bank level factors as well as shareholder level factors. For this purpose, we augment Eq. ( 1) by interacting each factor with the d(Category) Diversity variable. To save space, we only present the results obtained using the Income Diversity measure for the variables of interest. The results obtained using the Noninterest Income Diversity measure are qualitatively the same and they are available on request.

12 For instance, for control chains composed only of institutional investors [i.e., d(Institutional) = 1 and d(Bank) = d(Industry)

= d(Family) = d(State) = 0], the calculation is as follows:

SDROA Asset Diversity = 0.00 0.00 = 0.00 . Hence, for a one standard deviation increase in Income Diversity (12.41%), SDROA will decrease by 0.00 × % (from 0.47% to 0.42%).

Bank level factors

First, we test whether the incentives of controlling shareholders to transmit information and skills to the bank to easily diversify increase with the concentration of their financial interests held in that bank. Second, because the ultimate owner is the one who will lastly reap the benefits of a successful diversification -especially from profit diversion-, she/he may have greater incentives to encourage intermediate shareholders to cooperate and transmit their skills to the bank. Hence, the mitigating roles played by controlling shareholders should be greater in the case of a single ultimate owner than in the presence of multiple ultimate owners.

Third, small banks may suffer more from the lack of expertise to manage diverse activities (e.g., [START_REF] Mercieca | Small European banks: Benefits from diversification[END_REF] and, as a consequence, they should benefit more from the technology transmitted by controlling shareholders than large banks.

To capture such effects, we define three dummy variables. We differentiate banks with high and low ownership concentration and define a dummy variable d(CFRConcentration)

which takes a value of one if the variable CFRConcentration is greater than the median value.

To capture the effect of the multiplicity of ultimate owners and the effect of bank size, we define two dummy variables, d(Single) and d(Small), which, respectively, take a value of one if the bank is controlled by one ultimate owner and if the bank's total assets variable is below the median value. The results in Table 7 show that the presence of institutional investors, banking institutions and industrial companies is beneficial only when the bank is controlled by a single ultimate owner and that these benefits are present regardless of the degree of ownership concentration/dispersion within control chains. 13 Coherently, the results also show that even though both large and small banks benefit from the presence of these controlling shareholders, the benefits are stronger for small banks.

[Insert Table 7 about here]

Shareholder level factors

First, we consider the effect of foreign ownership. Under the global advantage hypothesis, foreign owners are generally associated with better networks and partnerships, have superior skills and can bring substantial improvements in terms of technological advancement and risk management [START_REF] Berger | Globalization of financial institutions: Evidence from cross-border banking performance[END_REF]. However, under the home field advantage view (e.g., [START_REF] Lensink | Does foreign ownership foster bank performance?[END_REF], domestic owners hold a home country advantage and should be more efficient in mitigating diseconomies of diversification than are foreign owners. To test these hypotheses, we distinguish between foreign and domestic owners and define a set of dummy variables d(Domestic j ) which take a value of one if at least one shareholder of the category j is domestic. Second, we test whether the effectiveness of a shareholder in mitigating diseconomies of diversification depends on the extent to which this shareholder is diversified. Publicly-listed controlling shareholders are expected to be more diversified and to have more skills and experience in different activities. We hence use the public nature of a controlling shareholder as a proxy for the degree of her/his diversification and define a set of dummy variables d(ListedOwner j ) which take a value of one if at least one shareholder of the category j is publicly-listed. In some cases, Bankscope and Amadeus do not provide information on the owner's country especially when the owner is a family. Given the information we have, we only separate banking owners, institutional owners and industries (for which we have complete information) into foreign and domestic owners and into publicly-listed and privately-owned shareholders. This is not a serious shortcoming of this study because the remaining categories of owners (Family and State) are not found to affect the relationship between diversification and bank performance. Given this data constraint and for consistency, we exclude from the model the interactions between the diversity measure and the family and state dummies.

The results reported in Table 8 show that both domestic and foreign owners contribute to mitigate diseconomies of diversification but such mitigating roles are higher for domestic owners, consistent with the home field advantage view. 14 Coherently, the results also show that publicly-listed owners are more efficient in mitigating diseconomies of diversification than privately-owned shareholders.

[Insert Table 8 about here]

Conclusion

The objective of this study is to empirically investigate whether banks controlled by certain categories of shareholders are better able to benefit from their diversification strategy. For this purpose, we build the control chains of 710 commercial banks established in 17 Western

European countries during the 2002-2010 period and classify banks according to the composition of their control chains.

14 Similarly, [START_REF] Claessens | How does foreign entry affect domestic banking markets[END_REF] investigate performance differences between domestic and foreign banks in developed and developing countries. They find that domestic banks have higher profits than foreign banks in developed countries and the opposite is the case in developing countries. This might explain why our results obtained on developed countries do not corroborate those obtained by prior studies which focus on emerging countries (e.g., [START_REF] Berger | The effects of focus versus diversification on bank performance: Evidence from Chinese banks[END_REF][START_REF] Pennathur | Income diversification and risk: Does ownership matter? An empirical examination of Indian banks[END_REF]. As an additional analysis, we would like to differentiate European and Non-European foreign owners and test whether the former are more effective in mitigating diseconomies of diversification. However, a deeper look to the data shows that most of foreign owners come from European countries.

On the whole, our results show that diversification performance depends on the categories of shareholders involved in the bank's control chain. More specifically, the results indicate that greater activity diversification is associated with higher risk and higher default risk when banks have no controlling shareholder or have only families and states as controlling shareholders. However, banks having as controlling shareholders other banking institutions, institutional investors and industrial companies enjoy economies of diversification: they display higher profitability, lower risk and lower default risk. This result is consistent with our prediction that unlike family and state shareholders, the presence of institutional investors, banking institutions as well as industrial companies in the bank's control chain is a source of additional skills and expertise which help the bank to reap the benefits accruing from activity diversification. A deeper analysis shows that such mitigating roles are greater for domestic and diversified owners and that small banks benefit more from the presence of such powerful shareholders than large banks. The results also show that as long as the bank is under the control of one ultimate owner, intermediate controlling shareholders are effective in constraining diseconomies of diversification regardless of the extent of their financial interests held in the bank.

From a policy perspective, our findings suggest that banks' supervisors and regulators should consider the effect of ownership structure when evaluating the impact of more stringent activity restrictions on bank performance. In countries where banks are likely to be widely-held or to be controlled by state or family owners, greater activity diversification is likely to yield diseconomies. But, in countries with concentrated ownership involving institutional investors, banking institutions and industrial companies, banks could enjoy economies of activity diversification thanks to the experience of their controlling shareholders in managing a wide range of activities. Furthermore, our study suggests that diseconomies of activity diversification in European banks arise, at least partially, from the shortage of experience in managing diverse activities. This figure provides an example of a control chain of a bank (BANK). S refers to each corporation presented in each box. Arrows represent equity stakes held by each corporation in the bank (BANK) or in other corporations in the control chain. The reported bank has nine controlling owners of which three are ultimate owners (S3, S6, and S9). Aggregate rights of each owner are the sum of direct and indirect rights. Direct rights (either control or cash-flow rights) refer to the percentage of shares directly held by the owner in the bank. Indirect control rights are computed on the basis of the last link method initially proposed by La [START_REF] Porta | Corporate ownership around the World[END_REF] as the percentage of shares held by the closest corporation to the bank. Indirect cash-flow rights are calculated as the product of the percentages of shares held by the shareholders along the indirect control chain. CR and CFR indicate aggregate control rights and aggregate cash-flow rights of each owner. Cash-flow rights of each shareholder are computed as: CFR1 (S1) = 20%; CFR2 (S2) = 20% 30% = 6%; CFR3 (S3) = 20% 30% 15% + 30% = 30.9%; CFR4 (S4) = 20%; CFR5 (S5) = 20% 15% = 3%; CFR6 (S6) = 20% 15% 20% = 0.6%; CFR7 (S7) = 15%; CFR8 (S8) = 15% 30% = 4.5%; CFR9 (S9) = 15% 30% 20% = 0.9%. This table reports information on the distribution of the sample banks according to the type of all shareholders in the control chains (Panel 1) and the type of ultimate owners (Panel 2), using a control threshold of 10%. We classify the controlling shareholders involved in the control chains into five categories: a bank (Bank); a financial company, an insurance company, a mutual or a pension fund (Institutional); an industrial firm (Industry); an individual, a family or a manager (Family); a state or a public authority (State). This table reports the performance (profitability and risk) of the sample banks according to the composition of their control chains and their degree of diversification over the 2002-2010 period. Using a control threshold of 10%, we differentiate widely-held banks and controlled banks. d(Widely) is a dummy equal to one if the bank is widely-held (with no controlling shareholder), and zero otherwise. We classify the controlling shareholders involved in control chains into five categories: a bank (Bank); a financial company, an insurance company, a mutual or a pension fund (Institutional); an industrial firm (Industry); an individual, a family or a manager (Family); a state or a public authority (State). d(Bank), d(Institutional), d(Industry), d(Family), and d(State) are dummies equal to one if at least one shareholder of the corresponding category is present in the bank's control chain, and zero otherwise. We divide each group of banks into diversified and nondiversified banks. We consider as diversified (Diversified), banks with an above-median value of the Income Diversity measure and as non-diversified (Nondiversified), banks with a below-median value of the Income Diversity measure. ROA is the return on assets defined as net income divided by total assets. SDROA is the three-year rolling-window standard deviation of the return on assets. RAROA is the return on assets divided by its three-year rolling-window standard deviation. ZScore is a measure of bank default risk. T-statistics test for the null: "profitability and risk are not different between non-diversified and diversified banks inside each group". *, **, and *** indicate significance at the 10%, 5% and 1% levels, respectively, for a bilateral test. . We measure product diversification using income (Panel 1) and non-interest income (Panel 2) diversity measures. ROA is the return on assets defined as net income divided by total assets. SDROA is the three-year rolling-window standard deviation of the return on assets. RAROA is the return on assets divided by its three-year rolling-window standard deviation. ZScore is a measure of bank default risk. Income Diversity is 1- [START_REF] Blundell | Initial conditions and moment restrictions in dynamic panel data models[END_REF] estimation results of the effect of ownership type on diversification performance [Eq. ( 1)] for a sample of European commercial banks over the 2002-2010 period. We measure product diversification using income (Panel 1) and non-interest income (Panel 2) diversity measures. ROA is the return on assets defined as net income divided by total assets. SDROA is the three-year rolling-window standard deviation of the return on assets. RAROA is the return on assets divided by its three-year rolling-window standard deviation. ZScore is a measure of bank default risk. Year + i + it . ROA is the return on assets defined as net income divided by total assets. SDROA is the threeyear rolling-window standard deviation of the return on assets. RAROA is the return on assets divided by its three-year rolling-window standard deviation. ZScore is a measure of bank default risk. We measure product diversification using Income Diversity defined as 1- Ownership structure and diversification performance: effect of foreign ownership and the degree of owners' diversification

Bank

ROA

This table shows the [START_REF] Blundell | Initial conditions and moment restrictions in dynamic panel data models[END_REF] estimation results of the effect of foreign/domestic ownership (Panel 1) and the effect of the degree of owners' diversification (Panel 2) on product diversification performance for a sample of European commercial banks over the 2002-2010 period. We here estimate this augmented version of Eq. ( 1), where d(Factor) is a dummy variable that stands for one of the two factors we consider: + y it-1 ' X + ' Country + ' Year + + it . ROA is the return on assets defined as net income divided by total assets.

SDROA is the three-year rolling-window standard deviation of the return on assets. RAROA is the return on assets divided by its three-year rolling-window standard deviation.

ZScore is a measure of bank default risk. We measure product diversification using Income Diversity defined as 1-

  e., the right to control) and cashflow rights (i.e., the right to receive dividends) of all intermediate and ultimate owners involved in the control chain which we use to compute some ownership indicators. The aggregate control rights (CR) and the aggregate cash-flow rights (CFR) of a shareholder are the sum of direct and indirect rights held in the bank. Direct rights (control or cash-flow rights) indicate the percentage of shares directly held in the bank. Following the last link method as initially proposed by La Porta et al. (1999), we compute indirect control rights as the percentage of shares held by the closest corporation to the bank. For robustness considerations, we also compute indirect control rights based on the weakest link method

Fig. 1

 1 Fig.1reports an example of a control chain to clarify how we define our ownership measures. The control chain of the reported bank is composed of nine controlling shareholders: two banking institutions (S2 and S4), three institutional investors (S1, S7 and S8), one industrial company (S5), two family investors (S3 and S9), and one state (S6). Cashflow rights of each shareholder (CFR s ) are computed as: CFR 1 (S1) = 20%; CFR 2 (S2) = 6%; CFR 3 (S3) = 30.9%; CFR 4 (S4) = 20%; CFR 5 (S5) = 3%; CFR 6 (S6) = 0.6%; CFR 7 (S7) = 15%; CFR 8 (S8) = 4.5%; CFR 9 (S9) = 0.9%. is then computed as: CFR = 1 9

  10. CFRConcentration of this bank is therefore equal to 11.21% (1 -0.10) = 10.09%. Control rights of each shareholder are: CR1 (S1) = CR2 (S2) = 20%; CR3 (S3) = 50%; CR4 (S4) = CR5 (S5) = CR6 (S6) = 20%; CR7 (S7) = CR8 (S8) = CR9 (S9) = 15%.

  one if the bank has at least an institutional investor (Institutional) as a controlling shareholder, and zero otherwise. one if the bank has at least an industrial company (Industry) as a controlling shareholder, and zero otherwise. one if the bank has at least a family investor (Family) as a controlling shareholder, one if the bank has at least a state (State) as a controlling shareholder, and zero otherwise. defined as the ratio of net income to total assets (rolling-window standard deviation of the return on assets (divided by its three-year rolling-window standard deviation.

  if at least one shareholder of the corresponding category is present in the bank's control chain, and zero otherwise. In line with the aim of the paper, we do not look at the effect of ultimate owners solely (e.g.,[START_REF] Lins | Equity ownership and firm value in emerging Markets[END_REF][START_REF] Lins | Does family control matter? International evidence from the 2008-2009 financial crisis[END_REF][START_REF] Amit | The role of institutional development in the prevalence and performance of entrepreneur and family-controlled firms[END_REF] but we consider the effect of all intermediate and ultimate owners involved in the bank's control chain. By considering both intermediate and ultimate owners we get dummy variables that are not mutually exclusive, meaning that a given bank could have all categories of shareholders in the control chain and, as a consequence, the five dummy variables can simultaneously take a

	investors (Family); and states or public authorities (State). We then define a set of dummy
	, we use a control threshold of 10%. For robustness variables [d(Category)] to capture the presence of each category of shareholders in the bank's
	considerations, we increase the control threshold and recalculate ownership variables with a control chain: d(Bank), d(Institutional), d(Industry), d(Family), and d(State) which take a
	control level of 20% instead of 10%. Based on this control threshold, we draw the control value of one
	chain for each bank for three years of the sample period: 2004, 2006, and 2010. The first two
	years allow us to capture ownership structure before the financial crisis. The last year (2010)
	takes into account potential changes in ownership structure that may have come from
	government intervention during the financial crisis. We choose the year 2004 as our starting
	point for ownership data rather than 2002 because before 2004, Bankscope and Amadeus do
	not provide information on the categories of shareholders. Ownership structure is known to be
	relatively stable over a short time period (e.g., La Porta et al., 1999; Laeven and Levine,
	2009) and, as a consequence, building control chains for only three years of the sample period
	is reasonably accurate to capture the ownership structure. We assume that ownership of 2004
	is similar to ownership of 2002 and 2003, ownership of 2006 is identical to ownership of
	2005 and that ownership of 2007, 2008 and 2009 comes from 2010. 2
	To build control chains, we first identify direct shareholders holding at least 10% of the shares
	of each bank by collecting data from Bankscope and annual reports disclosed in the banks'
	websites. We consider as controlled, banks having at least one shareholder with 10% or more
	of shares and as widely-held, banks with no controlling shareholder. We then examine the
	ownership structure of these identified controlling shareholders. If these shareholders are
	family investors or states, we stop tracing the control chain and consider these to be the
	ultimate controlling owners. If, however, some or all of the controlling shareholders identified
	at this direct tier of the control chain are themselves financial or nonfinancial institutions, we
	go further and analyze the ownership structure of each owner found at an intermediate tier
	until we reach the ultimate owners. We collect ownership data on non-banking firms found as
	controlling shareholders at the intermediate tiers from the Amadeus database and annual
	reports available on websites.
	We use these control chains to identify all intermediate and ultimate shareholders involved
	in the bank's control chain. We classify these shareholders into five categories: banks (Bank);
	institutional investors including insurance companies, mutual and pension funds, and financial
	companies (Institutional); industrial companies (Industry); managers, individuals or family

value of one. This approach allows us to assess the diversification performance for any combination of shareholder categories. The experience of a certain category of shareholders should depend only on the category itself and not on the number of shareholders of such a category that are present in the control chain. Therefore, the use of binary variables is reasonably accurate.

3

  Net Operating Income is the sum of Net Interest Income and Net Noninterest Income. 7 Net Noninterest Income is the sum of Fee Income (fee and commission income) and Trading Income (trading income and other non-interest income). By construction, both measures range between zero and a half. Income Diversity (Noninterest Income Diversity) is equal to zero when diversification reaches its minimum, meaning that net operating income (net non-interest income) stem entirely either from interest based activities (fee/commission generating activities) or from non-interest based activities (trading activities). They are equal to a half when there is a complete diversification. 8

	Income Diversity = 1-	Net Interest Income Net Operating Income	2	+	Net Noninterest Income Net Operating Income	2	,	(3)
	where, The second measure referred to as Noninterest Income Diversity captures the degree of
	diversification within non-interest activities by disaggregating non-interest income into two
	components as follows:
	Noninterest Income Diversity=1-	Fee Income Net Noninterest Income	2	+	Trading Income Net Noninterest Income	2	,	(4)
	where,

Table 1

 1 Distribution of European commercial banks and representativeness of the final sampleThis table shows the breakdown of European commercial banks by country and the representativeness of the sample. To assess the sample's representativeness, we compute the ratio of aggregate total assets of the banks included in the final sample to aggregate total assets of all the banks provided in Bankscope from 2002 to 2010.

	Country	Number of all banks	Number of listed banks	Total assets of all sample banks divided by total
				assets of all banks provided in Bankscope (%)
	Austria	30	4	68.412
	Belgium	22	1	91.176
	Denmark	45	29	95.566
	Finland	6	1	64.254
	France	89	9	79.322
	Germany	81	8	80.915
	Greece	16	9	97.336
	Ireland	13	3	58.771
	Italy	111	14	93.870
	Luxembourg	53	4	77.230
	Netherlands	22	3	30.459
	Norway	6	2	88.835
	Portugal	14	3	86.496
	Spain	37	8	98.069
	Sweden	15	2	93.189
	Switzerland	70	3	96.382
	United Kingdom	80	2	47.794
	Total/Mean	710	105	79.298
	Fig. 1
	Example of a control chain

Table 2

 2 Definition and summary statistics of the main variables

	Definition
	Variable name

Table 3

 3 Distribution of the sample by ownership type

Table 4

 4 Diversification performance by ownership type: univariate analyses

Table 5

 5 Product diversification performanceThis table shows the[START_REF] Blundell | Initial conditions and moment restrictions in dynamic panel data models[END_REF] estimation results of the effect of product diversification on performance (profitability and risk) for a sample

	of	European	commercial	banks	over	the	2002-2010	period.	We	here	estimate	this	baseline	equation:
					+ y it-1

  State) are dummies equal to one if at least one shareholder of the corresponding category (Bank, Institutional, Industry, Family, State) is present in the bank's control chain, and zero otherwise. The definition of all control variables is provided in Table2. In all the regressions, Country and Year dummies are included but not reported. Hansen test is a test of the overidentifying restrictions under the null of the absence of correlation between the instruments and the error term. AR2 test is a test of the absence of second order residual autocorrelation. P-values based on robust standard errors are shown in parentheses. *, ** and *** indicate statistical significance at the 10%, 5% and 1% levels, respectively.

	Table 6
	Ownership structure and diversification performance
	This table shows the
			Net Interest Income Net Operating Income	2	+	Net Noninte rest Income Ne t Operating Income	2	, with Net Operating Income is defined as the sum of Net
	Interest Income and Net Noninterest Income. Noninterest Income Diversity is 1-	Fee Income Net Noninte rest Income	2	+	Trading Income Net Noninterest Income	2	, with Net Noninterest Income is
	the sum of Fee Income and Trading Income. d(Bank), d(Institutional), d(Industry), d(Family), and d(Diversity measures Panel 1: Income Diversity	Panel 2: Noninterest Income Diversity
	Dependent variable	ROA	SDROA RAROA	ZScore		ROA	SDROA RAROA	ZScore
	Diversity ( )	0.005**	0.003**	0.046		-2.628**		0.003*	0.003**	-0.025	-3.132**
		(0.035)	(0.022)	(0.170)		(0.011)		(0.081)	(0.041)	(0.583)	(0.033)
	d(Bank)	0.021	-0.043	-0.141		-6.512		0.006	-0.038	-0.281	-10.146
		(0.653)	(0.401)	(0.672)		(0.420)		(0.970)	(0.452)	(0.624)	(0.202)
	d(Institutional)	0.046	0.059	-0.108		-3.758		-0.045	0.045	-0.042	-4.563
		(0.514)	(0.171)	(0.796)		(0.501)		(0.510)	(0.291)	(0.941)	(0.423)
	d(Industry)	-0.003	0.043	-0.519		-3.717		-0.002	0.062	-0.502	-4.330
		(0.921)	(0.334)	(0.258)		(0.455)		(0.996)	(0.332)	(0.410)	(0.352)
	d(Family)	-0.350***	-0.071	0.552		2.130		-0.382***	-0.055	0.826	4.622
		(0.001)	(0.342)	(0.534)		(0.901)		(0.000)	(0.434)	(0.232)	(0.710)
	d(State)	0.055	-0.263***	2.002		29.241**		0.034	-0.251***	2.004	30.652**
		(0.662)	(0.001)	(0.313)		(0.026)		(0.656)	(0.001)	(0.431)	(0.025)
	ExcessControl	-0.002**	0.001*	-0.024** -0.611**		-0.002**	0.001*	-0.023*	0.659**
		(0.015)	(0.072)	(0.032)		(0.022)		(0.041)	(0.075)	(0.066)	(0.025)
	Lagged dependent variable	0.163***	0.038	0.459**		0.521**		0.159**	0.030	0.385**	0.473**
		(0.006)	(0.125)	(0.021)		(0.025)		(0.021)	(0.310)	(0.022)	(0.032)
	Log(Assets)	0.062**	-0.020	-0.020		-4.625**		0.067***	-0.021*	-0.032	-3.612**
		(0.021)	(0.110)	(0.732)		(0.015)		(0.003)	(0.081)	(0.561)	(0.011)
	Equity	0.051**	0.022***	0.010		4.121*		0.055***	0.019**	0.006	4.215*
		(0.012)	(0.004)	(0.510)		(0.013)		(0.004)	(0.020)	(0.891)	(0.054)
	Deposits	0.006**	0.001	0.004		-0.210**		0.006**	0.000	0.009	-0.236**
		(0.020)	(0.614)	(0.512)		(0.012)		(0.031)	(0.810)	(0.315)	(0.014)
	Loans	0.003	-0.003**	0.030**		0.501**		0.002	-0.003*** 0.032*** 0.510***
		(0.311)	(0.015)	(0.010)		(0.021)		(0.321)	(0.005)	(0.008)	(0.009)
	d(Listed)	0.062	-0.022	0.412		-1.009		0.071	-0.029	0.492	-1.201
		(0.512)	(0.231)	(0.613)		(0.641)		(0.415)	(0.541)	(0.513)	(0.710)
	GDPGrowth	0.012** -0.011*** 0.230**		0.531		0.012** -0.012*** 0.224**	0.421
		(0.031)	(0.009)	(0.022)		(0.210)		(0.027)	(0.001)	(0.021)	(0.402)
	Constant	-0.852*** 0.526**	0.505		60.914**		-0.652*	0.495*	1.015	73.160**
		(0.009)	(0.010)	(0.821)		(0.015)		(0.081)	(0.089)	(0.551)	(0.011)
	Number of observations	4,615	4,615	4,615		4,615		4,615	4,615	4,615	4,615
	Number of banks	710	710	710		710		710	710	710	710
	Hansen test (p-value)	0.201	0.610	0.212		0.432		0.231	0.711	0.193	0.440
	AR2 test (p-value)	0.181	0.112	0.172		0.191		0.169	0.112	0.156	0.181

Table 7

 7 Net Operating Income is defined as the sum of Net Interest Income and Net Noninterest Income. State) are dummies equal to one if at least one shareholder of the corresponding category (Bank, Institutional, Industry, Family, State) is present in the bank's control chain, and zero otherwise. The definition of all control variables is provided in Table2. In all the regressions, Country and Year dummies are included but not reported. Hansen test is a test of the over-identifying restrictions under the null of the absence of correlation between the instruments and the error term. AR2 test is a test of the absence of second order residual autocorrelation. P-values based on robust standard errors are shown in parentheses. *, ** and *** indicate statistical significance at the 10%, 5% and 1% levels, respectively. Ownership structure and diversification performance: effect of ownership concentration, multiplicity of ultimate owners and bank size This table shows the[START_REF] Blundell | Initial conditions and moment restrictions in dynamic panel data models[END_REF] estimation results of the effect of ownership concentration within the control chain (Panel 1), multiplicity of ultimate owners (Panel 2), and the effect of bank size (Panel 3) on product diversification performance for a sample of European commercial banks over the 2002-2010 period. We here estimate this augmented version of Eq. (1), where d(Factor) is a dummy variable that stands for one of the three factors we consider:

	Income

high vs low ownership concentration [d(Factor)=d(CFRConcentration)] Panel 2: single vs multiple ultimate owners [d(Factor)=d(Single)] Panel 3: large vs small banks [d(Factor)=d(Small)]

  Net Operating Income is defined as the sum of Net Interest Income and Net Noninterest Income. d(Bank), d(Institutional), d(Industry), d(Family), and d(State) are dummies equal to one if at least one shareholder of the corresponding category (Bank, Institutional, Industry, Family, State) is present in the bank's control chain, and zero otherwise. d(CFRConcentration) is a dummy equal to one if the variable CFRConcentration reflecting concentration/dispersion of cash-flow rights within the control chain is greater than the median value, and zero otherwise. d(Single) is a dummy equal to one if the bank is controlled by one ultimate owner, and zero otherwise. d(Small) is a dummy equal to one if the bank's total assets variable is below the median value, and zero otherwise. The definition of the control variables included in the regressions is provided in Table 2. Country and Year dummies are also included in all the regressions but not reported. Hansen test is a test of the over-identifying restrictions under the null of the absence of correlation between the instruments and the error term. AR2 test is a test of the absence of second order residual autocorrelation. P-values based on robust standard errors are shown in parentheses. *, ** and *** indicate statistical significance at the 10%, 5% and 1% levels, respectively.

	ZScore	-1.925**	(0.023)	5.061**	(0.027)	5.415**	(0.019)	4.315*	(0.056)	-2.251	(0.415)	-2.153	(0.462)	2.071**	(0.021)	2.871**	(0.033)	1.223*	(0.074)
	ROA SDROA RAROA	0.003** 0.002 0.225	(0.012) (0.314) (0.613)	0.001* -0.004** 2.602*	(0.067) (0.040) (0.066)	0.002* -0.005** 2.702*	(0.056) (0.021) (0.068)	0.000 -0.004* 1.609**	(0.556) (0.097) (0.521)	0.000 0.002* 0.762	(0.671) (0.062) (0.412)	0.000 0.002* 0.511	(0.751) (0.052) (0.405)	0.001** -0.001** 3.251**	(0.025) (0.031) (0.021)	0.001** -0.002** 3.781**	(0.020) (0.028) (0.022)	0.001* -0.001* 2.281*	(0.095) (0.067) (0.052)
	ZScore	-3.099**	(0.035)	-1.001	(0.652)	-2.138*	(0.095)	0.161	(0.326)	-1.610	(0.511)	-1.565	(0.356)	10.083**	(0.022)	11.813*	(0.094)	8.011*	(0.211)
	RAROA	0.052	(0.512)	0.022	(0.821)	0.182	(0.462)	-0.022	(0.881)	-0.331	(0.512)	-0.200	(0.661)	3.110**	(0.011)	3.423**	(0.018)	2.221*	(0.083)
	SDROA	0.003**	(0.027)	0.001	(0.541)	0.001	(0.421)	-0.000	(0.651)	-0.000	(0.8260)	0.000	(0.636)	-0.007**	(0.015)	-0.008**	(0.024)	-0.005*	(0.065)
	ROA	0.002**	(0.036)	0.000	(0.516)	0.001	(0.721)	0.001	(0.700)	0.000	(0.551)	0.000	(0.622)	0.001**	(0.041)	0.002**	(0.022)	0.001*	(0.076)
	ZScore	-3.011**	(0.015)	8.422**	(0.019)	8.916**	(0.011)	6.010*	(0.061)	-3.412*	(0.051)	-3.551*	(0.061)	0.421	(0.518)	0.374	(0.521)	0.055	(0.426)
	RAROA	-0.031	(0.502)	2.830**	(0.017)	3.015**	(0.013)	1.920**	(0.027)	0.091	(0.621)	0.052	(0.526)	0.028	(0.325)	0.032	(0.562)	0.010	(0.250)
	SDROA	0.002**	(0.037)	-0.005**	(0.022)	-0.006***	(0.002)	-0.004*	(0.061)	0.001	(0.509)	0.002	(0.519)	-0.000	(0.411)	-0.001	(0.478)	0.001	(0.615)
	Net Interest Income 2 + Net Operating Income Net Noninte rest Income Net Operating Income 2 , with Panel 1: Dependent variable ROA	Diversity ( 0 ) 0.002**	(0.011)	d(Bank) Diversity ( 1 ) 0.002**	(0.012)	d(Institutional) Diversity ( 2 ) 0.003**	(0.022)	d(Industry) Diversity ( 3 ) 0.001*	(0.061)	d(Family) Diversity ( 4 ) 0.001	(0.602)	d(State) Diversity ( 5 ) 0.000	(0.516)	d(Bank) d(Factor) Diversity ( ' 1 ) 0.001	(0.265)	d(Institutional) d(Factor) Diversity ( ' 2 ) 0.001	(0.180)	d(Industry) d(Factor) Diversity ( ' 3 ) 0.000	(0.501)

Table 7

 7

  Income is defined as the sum of Net InterestIncome and Net Noninterest Income. d(Bank), d(Institutional), and d(Industry) are dummies equal to one if at least one shareholder of the corresponding category (Bank, Institutional, Industry) is present in the bank's control chain, and zero otherwise. In Panel 1, d(Factor) stands to the dummy variable d(Domesticj) which takes a value of one if at least one shareholder of the category j is domestic, and zero otherwise. In Panel 2, d(Factor) refers to the dummy variable d(ListedOwnerj) which takes a value of one if at least one shareholder of the category j is publicly-listed, and zero otherwise. The definition of the control variables is provided in Table2. Country and Year dummies are also included in all the regressions but not reported. Hansen test is a test of the over-identifying restrictions under the null of the absence of correlation between the instruments and the error term. AR2 test is a test of the absence of second order residual autocorrelation. P-values based on robust standard errors are shown in parentheses. *, ** and *** indicate statistical significance at the 10%, 5% and 1% levels, respectively.

								Ne t Interest Income Net Operating Income	2	+	Net Noninterest Income Net Operating Income	2	, with Net Operating
				Panel 1: foreign vs domestic owners	Panel 2: privately-owned vs publicly-listed owners
	Dependent variable	ROA SDROA RAROA ZScore	ROA	SDROA	RAROA	ZScore
	Diversity ( 0 )		0.002** 0.003**	0.101 -2.011**	0.003**	0.002**	0.107	-2.010**
				(0.012) (0.026) (0.612)	(0.025)	(0.012)	(0.026)	(0.231)	(0.027)
	d(Bank) Diversity ( 1 )	0.001** -0.003* 2.461** 4.609**	0.001*	-0.004**	2.045**	4.620**
				(0.032) (0.058) (0.022)	(0.033)	(0.061)	(0.023)	(0.036)	(0.031)
	d(Institutional) Diversity ( 2 )	0.002** -0.002** 3.099** 5.131**	0.001**	-0.005**	2.605**	4.826**
				(0.024) (0.041) (0.040)	(0.021)	(0.026)	(0.012)	(0.031)	(0.022)
	d(Industry) Diversity ( 3 )	0.000	-0.001* 1.733**	4.406*	0.001	-0.003*	1.891**	3.263*
				(0.362) (0.061) (0.031)	(0.065)	(0.185)	(0.066)	(0.042)	(0.071)
	d(Bank) d(Factor) Diversity ( ' 1 )	0.002** -0.002* 0.788** 1.991**	0.002**	-0.001**	1.072**	1.683**
				(0.027) (0.055) (0.043)	(0.015)	(0.043)	(0.042)	(0.036)	(0.014)
	d(Institutional) d(Factor) Diversity ( ' 2 )	0.002** -0.003** 0.895** 2.019**	0.002**	-0.002**	1.210**	2.061**
				(0.011) (0.034) (0.020)	(0.021)	(0.021)	(0.011)	(0.021)	(0.015)
	d(Industry) d(Factor) Diversity ( ' 3 )	0.001* -0.003** 0.633*	0.801*	0.001*	-0.001*	0.605*	1.101*
				(0.062) (0.044) (0.071)	(0.081)	(0.067)	(0.063)	(0.055)	(0.061)
	Control variables	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
	Number of observations	4,615	4,615	4,615	4,615	4,615	4,615	4,615	4,615
	Number of banks	710	710	710	710	710	710	710	710
	Hansen test (p-value)	0.281	0.417	0.522	0.750	0.213	0.413	0.425	0.525
	AR2 test (p-value)	0.412	0.228	0.201	0.210	0.304	0.211	0.209	0.211
	Marginal effects			Foreign owners			Privately-owned owners
	0 + 1			0.003** 0.000	2.562** 2.598**	0.004**	-0.002*	2.152*	2.610*
	0 + 2			0.004** 0.001	3.200** 3.120**	0.004**	-0.003**	2.712**	2.816*
	0 + 3			0.002*	0.002	1.834	2.395**	0.004**	-0.001*	1.998*	1.253
	0 + 1	2	3	0.005** -0.003* 7.394** 12.135*** 0.006**	-0.010***	6.648**	10.699***
					Domestic owners			Publicly-listed owners
	0 + 1 + ' 1		0.005** -0.002** 3.350** 4.589**	0.006**	-0.003**	3.224**	4.293**
	0 + 2 + ' 2		0.006** -0.002** 4.095** 5.139**	0.006**	-0.005**	3.922**	4.877**
	0 + 3 + ' 3		0.003** -0.001* 2.467** 3.196**	0.005**	-0.002*	2.603*	2.354*
	j	' j		0.010** -0.011** 9.710** 16.946**	0.011**	-0.014**	9.535**	15.544***
	j=0	j=1

For more details on the prevalence of multilayer ownership structures in the world, see, e.g., La[START_REF] Porta | Corporate ownership around the World[END_REF] Claessens et al.,

2000;[START_REF] Faccio | The ultimate ownership of Western European corporations[END_REF]

To ensure that our results are not driven by the use of only three years of ownership data, we run our regressions by only considering the three years for which ownership is available: 2004, 2006 and 2010. The estimation results, not reported here but available on request, remain unchanged.

Besides the use of dummy variables, for robustness considerations we also define five variables that capture the proportion of each category of shareholders involved in the bank's control chain as the ratio of the number of shareholders of each category to the total number of shareholders in the control chain. Because the composition of the control chains is stable over time, our results are not affected by the use of dummy or continuous variables.

For robustness considerations, we also define CFRConcentration based only on shareholders that are expected to bring additional skills to the bank (i.e., banks, institutional investors and industrial companies). The estimation results, not reported here but available on request, remain unchanged.

Unlike control rights, cash-flow rights are highly correlated with the layer to which each shareholder belongs: the higher the cash-flow rights the closer is the shareholder to the bank. Hence, unlike CRConcentration the variable CFRConcentration takes into account differences in the position of shareholders within the control chain.

Because loans can produce fee and commission income, the income-based diversification measure may overestimate the extent to which banks engage in nontraditional activities (e.g.,[START_REF] Laeven | Is there a diversification discount in financial conglomerates[END_REF]. Hence, as a robustness check, we use an asset-based diversification measure which captures the degree of diversification among loans and other earning assets. The estimation results, not reported here but available on request, remain unchanged.

Diversification effects (either positive or negative) on performance may have limits and become smaller when banks reach a higher level of diversification. Hence, for robustness considerations we account for such non-linearity by including in our regressions the quadratic term of the diversification measures like for instance in[START_REF] Stiroh | Diversification in banking: Is non-interest income the answer?[END_REF].

We perform similar analyses on the subsamples of publicly-listed and privately-owned banks. The results, not reported here but available on request, indicate that both subsamples of banks follow almost similar characteristics as the whole sample.

For robustness considerations, we run regressions by excluding from the initial sample banks having only one shareholder (corresponding to 460 observations). The estimation results, available on request, remain the same.

To check the robustness of the results, we rerun regressions separately on subsamples of crisis(2007)(2008)(2009)(2010) and sound(2002)(2003)(2004)(2005)(2006) years as well as on subsamples of publicly-listed and privately-owned banks. In both cases, the results, not reported here but available on request, remain unchanged.

The use of CRConcentration instead of CFRConcentration leads to similar conclusions. The results are available on request.