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

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  • Berger, Allen N.

    ()
    (BOFIT)

  • Hasan, Iftekhar

    (BOFIT)

  • Zhou, Mingming

    (BOFIT)

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.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 4/2010.

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Length: 50 pages
Date of creation: 25 Mar 2010
Date of revision:
Handle: RePEc:hhs:bofitp:2010_004

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Keywords: diversification; focus; efficiency; Chinese banking;

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