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The effects of focus versus diversification on bank performance: Evidence from Chinese banks

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  • Berger, Allen N.
  • Hasan, Iftekhar
  • Zhou, Mingming
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 may play important mitigating roles. This analysis may provide important implications for bank managers and regulators in China as well as in other emerging economies.

Suggested Citation

  • Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2010. "The effects of focus versus diversification on bank performance: Evidence from Chinese banks," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1417-1435, July.
    • Handle: RePEc:eee:jbfina:v:34:y:2010:i:7:p:1417-1435
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    More about this item

    Keywords

    Diversification Focus Efficiency Chinese banking;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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