Original Article
The Dilemma of International Diversification: Evidence from the European Sovereign Debt Crisis†
Bill B. Francis,
Iftekhar Hasan,
Gergana L. Kostova, Sami Ben Naceur,
Corresponding Author
Bill B. Francis
Lally School of Management, Rensselaer Polytechnic Institute, United States
Corresponding author: Lally School of Management, Rensselaer Polytechnic Institute, Troy, NY 12180, United States. Tel: +1-518-276-3908, email: francb@rpi.edu.
Search for more papers by this authorIftekhar Hasan
Fordham University, United States
Bank of Finland, Finland
University of Sydney, Australia
Search for more papers by this authorBill B. Francis,
Iftekhar Hasan,
Gergana L. Kostova, Sami Ben Naceur,
Corresponding Author
Bill B. Francis
Lally School of Management, Rensselaer Polytechnic Institute, United States
Corresponding author: Lally School of Management, Rensselaer Polytechnic Institute, Troy, NY 12180, United States. Tel: +1-518-276-3908, email: francb@rpi.edu.
Search for more papers by this authorIftekhar Hasan
Fordham University, United States
Bank of Finland, Finland
University of Sydney, Australia
Search for more papers by this authorFirst published: 14 April 2020
†
The authors are thankful to an anonymous reviewer, the editors (L. K. Ng and K. Park), R. Alsakka, and O. A. Gwilym for helpful comments and guidance. The usual caveats apply.
Abstract
This paper tests how capital markets value the international diversification of banks in good and in bad economic times by investigating changes in domestic and foreign sovereign debt ratings before and during the European sovereign debt crisis. Tracing 320 European banks in 29 countries and 226 credit rating announcements for European sovereigns between 1 January 2001 and 15 August 2012, we show that the market values banks with access to foreign funds. Despite occasional adverse effects immediately following negative news regarding sovereign credit rating changes, international diversification was found to be beneficial to European banks, especially during periods of distress.
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