Diversification, risk, and performance: Do the type of family and state ownership matter?
DOI:
https://doi.org/10.20414/jed.v5i3.8253Keywords:
diversification, bank, risk, performance, ownership, stateAbstract
Purpose — This study aims to examine the roles of the ultimate owners, i.e., family and state, as moderating factors on the relationships between bank diversification, risk, and performance. To capture different aspects of diversification, we consider bank income, loan, deposit, and asset diversifications.
Method — The data analysis technique employed in this research is multiple regression in the form of pooled regression. The data were sourced from the financial statements of 53 banks in Indonesia. It is worth noting that the data used in this study comprise panel data, which combines time series and cross-sectional data. This utilization of panel data serves to increase the depth of observation in the research.
Result — Income diversification provides benefits to banks in the form of risk reduction and performance improvement. On the other hand, loan, deposit, and asset diversifications have a negative impact on banks by enhancing risks and degrading performance. Furthermore, ownership of the bank by the family and the state negatively impacts income diversification, possibly due to the lack of ultimate expertise, which results in limitations in transferable skills. In contrast, ownership of the bank by the family can weaken the positive effects of loans and assets.
Contribution — This study provides significant insights into the development of banking research, offering a more comprehensive measure of diversification in terms of income, loans, deposits, and assets. Moreover, this study measures bank ownership through ultimate ownership, which can reveal the actual ownership of the bank.
Downloads
References
Acharya, V. V., Hasan, I., & Saunders, A. (2006). Should banks be diversified? Evidence from individual bank loan portfolios. The Journal of Business, 79(3), 1355-1412.
Anderson, R. C., & Reeb, D. M. (2003). Founding-Family Ownership and Firm Performance: Evidence from the S&P 500. The Journal of Finance, 58(3), 1301–1328. https://doi.org/10.1111/1540-6261.00567
Barry, T. A., Lepetit, L., & Tarazi, A. (2011). Ownership structure and risk in publicly held and privately owned banks. Journal of Banking and Finance, 35(5), 1327–1340. https://doi.org/10.1016/j.jbankfin.2010.10.004
Berger, A. N., Hasan, I., & Zhou, M. (2010a). The effects of focus versus diversification on bank performance: Evidence from Chinese banks. Journal of Banking and Finance, 34(7), 1417–1435. https://doi.org/10.1016/j.jbankfin.2010.01.010
Cerasi, V., & Daltung, S. (2000). The optimal size of a bank: Costs and benefits of diversification. European Economic Review, 44(9), 1701–1726. https://doi.org/10.1016/S0014-2921(99)00008-2
Cornett, M. M., Guo, L., Khaksari, S., & Tehranian, H. (2010). The impact of state ownership on performance differences in privately-owned versus state-owned banks: An international comparison. Journal of Financial Intermediation, 19(1), 74–94. https://doi.org/10.1016/j.jfi.2008.09.005
Cronqvist, H., & Nilsson, M. (2003a). Agency Costs of Controlling Minority Shareholders. The Journal of Financial and Quantitative Analysis, 38(4), 695. https://doi.org/10.2307/4126740
DeYoung, R., & Roland, K. P. (2001a). Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model. Journal of Financial Intermediation, 10(1), 54–84. https://doi.org/10.1006/jfin.2000.0305
Diamond, D. W. (1984). Financial intermediation as delegated monitoring: A simple example. Finance a Uver, 51(11), 693–694. https://doi.org/10.2307/2297430
Elsas, R., Hackethal, A., & Holzhäuser, M. (2010a). The anatomy of bank diversification. Journal of Banking and Finance, 34(6), 1274–1287. https://doi.org/10.1016/j.jbankfin.2009.11.024
Hayden, E., Porath, D., & Westernhagen, N. V. (2007). Does diversification improve the performance of German banks? Evidence from individual bank loan portfolios. Journal of Financial Services Research, 32(3), 123–140. https://doi.org/10.1007/s10693-007-0017-0
Hidayat, W. Y., Kakinaka, M., & Miyamoto, H. (2012a). Bank risk and non-interest income activities in the Indonesian banking industry. Journal of Asian Economics, 23(4), 335–343. https://doi.org/10.1016/j.asieco.2012.03.008
Klein, P. G., & Saidenberg, M. R. (2005). Diversification, Organization, and Efficiency: Evidence from Bank Holding Companies. SSRN Electronic Journal, February. https://doi.org/10.2139/ssrn.98653
La Porta, R., Lopez-De-Silanes, F., & Shleifer, A. (1999). Corporate Ownership Around the World. The Journal of Finance, 54(2), 471–517. https://doi.org/10.1111/0022-1082.00115
Laeven, L. (1999). Risk and Efficiency in East Asian Banks. Policy Research Working Paper Series, 1–38. https://doi.org/10.1596/1813-9450-2255
Laeven, L., & Levine, R. (2007). Is there a diversification discount in financial conglomerates? Journal of Financial Economics, 85(2), 331–367. https://doi.org/10.1016/j.jfineco.2005.06.001
Laeven, L., & Levine, R. (2008). Bank Governance, Regulation, and Risk Taking. https://doi.org/10.3386/w14113
Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008a). Bank income structure and risk: An empirical analysis of European banks. Journal of Banking and Finance, 32(8), 1452–1467. https://doi.org/10.1016/j.jbankfin.2007.12.002
Levine, R. (2004). Finance and Growth?: Theory and Evidence. NBER WORKING PAPER SERIES; Handbook of Economic Growth, September, 0–117.
Mercieca, S., Schaeck, K., & Wolfe, S. (2007). Small European banks: Benefits from diversification? Journal of Banking and Finance, 31(7), 1975–1998. https://doi.org/10.1016/j.jbankfin.2007.01.004
Meslier, C. (2014). Is bank income diversification beneficial? Evidence from an emerging economy. Journal of International Financial Markets, Institutions and Money, 31(1), 97–126. https://doi.org/10.1016/j.intfin.2014.03.007
Montgomery, C. A. (1994). Corporate Diversification. Journal of Economic Perspectives—Volume, 8(3), 163–178. https://doi.org/10.1257/jep.8.3.163
Pennathur, A. K., Subrahmanyam, V., & Vishwasrao, S. (2012). Income diversification and risk: Does ownership matter? An empirical examination of Indian banks. Journal of Banking and Finance, 36(8), 2203–2215. https://doi.org/10.1016/j.jbankfin.2012.03.021
Pindado, J., Requejo, I., & de la Torre, C. (2014). Family control, expropriation, and investor protection: A panel data analysis of Western European corporations. Journal of Empirical Finance, 27, 58–74. https://doi.org/10.1016/j.jempfin.2013.10.006
Saghi-Zedek, N. (2016a). Product diversification and bank performance: Does ownership structure matter? Journal of Banking and Finance, 71, 154–167. https://doi.org/10.1016/j.jbankfin.2016.05.003
San Martin-Reyna, J. M., & Duran-Encalada, J. A. (2012). The relationship among family business, corporate governance and firm performance: Evidence from the Mexican stock exchange. Journal of Family Business Strategy, 3(2), 106–117. https://doi.org/10.1016/j.jfbs.2012.03.001
Setiyono, B., & Tarazi, A. (2014a). Does diversity of bank board members affect performance and risk? Evidence from an emerging market. 1–41.
Stiroh, K. (2006). A portfolio view of banking with interest and noninterest activities. Journal of Money, Credit and Banking, 38(5), 1351–1361. https://doi.org/10.1353/mcb.2006.0075
Stiroh, K. J. (2004). Diversification in Banking: Is Noninterest Income the Answer? Journal of Money, Credit, and Banking, 36(5), 853–882. https://doi.org/10.1353/mcb.2004.0076
van Rixtel Adrian A. R. J. M., G. G. (2013). Financial crises and bank funding: recent experience in the euro area. BIS Working Papers No 406, No. 406(March), 1–36.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2023 Jul Aidil Fadli
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Authors who publish with this journal agree to the following terms:
1. Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
