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 - Gabelli School of Business; Bank of Finland

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
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Iftekhar Hasan

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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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