BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 4/2010:
The effects of focus versus diversification on bank performance: Evidence from Chinese banks
Allen N. Berger ()
, Iftekhar Hasan and Mingming Zhou
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; (follow links to similar papers)
JEL-Codes: G21; G28; G34; (follow links to similar papers)
50 pages, March 25, 2010
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