The Effects of Focus versus Diversification on Bank Performance: Evidence from Chinese Banks

50 Pages Posted: 25 Mar 2010

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Mingming Zhou

University of Colorado, Colorado Springs - College of Business

Date Written: March 23, 2010

Abstract

This paper investigates the effects of focus versus diversification on bank performance using data on Chinese banks during the 1996-2006 period. We construct a new measure, economies of diversification, and compare the results to those of the more conventional focus indices, which are based on the sum of squares of shares in different products or regions. Diversification is captured in four dimensions: loans, deposits, assets, and geography. We find that all four dimensions of diversification are associated with reduced profits and higher costs. These results are robust regardless of alternative measures of diversification and performance. Furthermore, we observe that banks with foreign ownership (both majority and minority ownership) and banks with conglomerate affiliation are associated with fewer diseconomies of diversification, suggesting that foreign ownership and conglomerate affiliation play an important mitigating role. This analysis may provide important implications for bank managers and regulators in China as well as in other emerging economies.

Keywords: diversification, focus, efficiency, Chinese banking

JEL Classification: G21, G28, G34

Suggested Citation

Berger, Allen N. and Hasan, Iftekhar and Zhou, Mingming, The Effects of Focus versus Diversification on Bank Performance: Evidence from Chinese Banks (March 23, 2010). BOFIT Discussion Paper No. 4/2010, Available at SSRN: https://ssrn.com/abstract=1578249 or http://dx.doi.org/10.2139/ssrn.1578249

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
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Wharton Financial Institutions Center

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European Banking Center

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Iftekhar Hasan

Fordham University ( email )

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Bank of Finland ( email )

P.O. Box 160
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Finland

University of Sydney ( email )

P.O. Box H58
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Australia

Mingming Zhou

University of Colorado, Colorado Springs - College of Business ( email )

1420 Austin Bluffs Parkway
Colorado Springs, CO 80933-7150
United States
1-719-255-5153 (Phone)

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