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The Effects of Diversification on Bank Performance from the Perspective of Risk, Return and Cost Efficiency

17 Pages Posted: 25 Aug 2008 Last revised: 6 Apr 2011

Begumhan Ozdincer

Istanbul Bilgi University

Cenktan Ozyildirim

Istanbul Bilgi University

Date Written: August 25, 2008

Abstract

The question of whether banks should diversify or focus in their activities may have different implications for a market where the banking industry is more settled versus a growth market that has not yet fully saturated. The aim of this paper is to investigate whether diversification pays off, in terms of risk return and cost efficiency, in a market which shows a great deal of growth potential.

The results of our empirical study can be summarized as follows: banks that are more diversified have higher return measured as return on solvency as well as increased credit risk. The cost income efficiency of more diversified banks is also higher than more focused ones. Our results also show that diversification does not have a significant impact on the market risk of a bank.

Keywords: Diversification, bank risk, return on solvency

JEL Classification: G21

Suggested Citation

Ozdincer, Begumhan and Ozyildirim, Cenktan, The Effects of Diversification on Bank Performance from the Perspective of Risk, Return and Cost Efficiency (August 25, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1253223 or http://dx.doi.org/10.2139/ssrn.1253223

Begumhan Ozdincer

Istanbul Bilgi University ( email )

kazim karabekir caddesi no 1
Istanbul, 34060
Turkey
0090 212 3117793 (Phone)
0090 212 4279440 (Fax)

Cenktan Ozyildirim (Contact Author)

Istanbul Bilgi University ( email )

Eski Silahtarağa Elektrik Santralı
Silahtarağa Mah. Kazım Karabekir Cad. No: 1 Eyüp
Istanbul, 34060
Turkey

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