Doctoral dissertation: Diversification strategies, bank risk and performance: Empirical evidence from Vietnam

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Diversification is usually seen as a strategy to improve bank risk and performance until the recent financial chaos, which has raised many concerns about this claim. Despite the growing number of empirical studies on the relationship between diversification strategy and banks' profitability, researchers have not yet been able to find a general agreement. One of the reasons is that the results for each country are different from the others. The well-founded evidence is mixed between countries and regions. In particular, regarding asset, income, and funding diversification measures, the conclusions are mixed on the impact on banks' performances and risks.

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Nội dung Text: Doctoral dissertation: Diversification strategies, bank risk and performance: Empirical evidence from Vietnam

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY --------------------------- PHAM KHANH DUY DIVERSIFICATION STRATEGIES, BANK RISK AND PERFORMANCE: EMPIRICAL EVIDENCE FROM VIETNAM Major: Finance and Banking Code: 9340201 DOCTORAL DISSERTATION ACADEMIC ADVISOR: Assoc. Professor Dr. TRUONG THI HONG Ho Chi Minh City - 2021
i STATEMENT OF AUTHENTICATION I solemnly declare that this dissertation, “Diversification strategies, bank risk and performance: Empirical evidence from Vietnam”, is my own research. Except for the references cited in this dissertation, I hereby guarantee that the whole or any part of this dissertation has never been published or used to obtain a degree elsewhere. Any products/studies of other authors that have been used in this dissertation were properly cited. This dissertation has never been submitted to any university or institution. Ho Chi Minh City, 2021
ii ACKNOWLEDGEMENT In completing this dissertation, I would like to express my gratitude to the University of Economics Ho Chi Minh City (UEH), which provides an ideal environment and financial support for my research journey. At UEH, I have gained valuable academic knowledge and research skills as a lecturer and as a Ph.D. candidate. My utmost appreciation is to my academic supervisor, Assoc. Prof. Dr. Truong Thi Hong, for dedicated, whole-heartedly coaching and guidance throughout the completion of my thesis. My gratitude also goes to my dearest colleagues at the School of Banking and the School of UEH Graduate for their continuously dedicated support, contributions, and guidance, for me in writing this dissertation. I want to thank Prof. Vo Xuan Vinh for the preliminary research ideas and suggestions. My special thanks to Dr. Nguyen Huu Huan, Dr. Ngo Minh Vu, Dr. Phan Chung Thuy, Dr. Hoang Hai Yen, and Dr. Ngo Minh Hai for their best efforts in helping me with various challenges during my Ph.D. candidature. Saying thank you is just simply not enough for what they have offered me. Finally and most importantly, my beloved family and best friends have always been by my sides, with unconditional love, encouragement, and endless support. Without them, this dissertation would have never been written. Thank you all for the most profound appreciation. Ho Chi Minh City, October 2021 Pham Khanh Duy
iii TABLE OF CONTENTS STATEMENT OF AUTHENTICATION ........................................................... i ACKNOWLEDGEMENT ................................................................................... ii TABLE OF CONTENTS .................................................................................... iii ABBREVIATION LIST .................................................................................... vii LIST OF TABLES ............................................................................................ viii LIST OF FIGURES ............................................................................................ ix ABSTRACT .......................................................................................................... x TÓM TẮT ............................................................................................................ xi CHAPTER 1 INTRODUCTION ........................................................................ 1 1.1. Research motivation ................................................................................. 1 1.2. Research background ................................................................................ 8 1.3. Research gap identification .................................................................... 11 1.4. Research objectives ................................................................................ 12 1.5. Research questions ................................................................................. 14 1.6. The scope of research ............................................................................. 15 1.7. Research procedure and methodology.................................................... 15 1.8. Research contributions ........................................................................... 17 1.9. Structure of the dissertation .................................................................... 19 CHAPTER 2 LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT .............................................................................................. 22
iv 2.1. Bank diversification definition .................................................................. 22 2.2. Classification of bank diversification strategies ........................................ 24 2.2.1. Asset diversification in the banking sector ......................................... 28 2.2.2. Income diversification in the banking sector ...................................... 30 2.2.3. Funding diversification in the banking sector .................................... 32 2.3. Theories of bank diversification ................................................................ 35 2.3.1. Theories of diversification .................................................................. 35 2.3.2. Theories of bank diversification ......................................................... 40 2.4. Concept and measurement of bank risk and performance ........................ 43 2.4.1. Concept and measurement of bank risk .............................................. 43 2.4.2. Concept and measurement of bank performance ............................... 46 2.5. Theoretical overview of banking crisis ..................................................... 47 2.6. The impact of diversification on bank risk and performance .................... 50 Although the concern on the impact of diversification on banks' risks and performance is discussed in various articles, the conclusion of this topic is still unclear. ............................................................................................................. 50 2.6.1. Asset diversification, bank risk, and performance ............................. 52 2.6.2. Income diversification, bank risk, and performance .......................... 56 2.6.3. Funding diversification, bank risk, and performance ......................... 60 2.6.4. Combinations of diversification strategies ......................................... 61 2.6.5. Bank diversification, risk and performance in the financial crisis ..... 62 2.6.6. Role of ownership structure in the nexus between diversification, risk and performance ........................................................................................... 64 2.7. Summary.................................................................................................... 67
v CHAPTER 3 DATA AND METHODOLOGY ............................................... 68 3.1. Data sample ............................................................................................... 68 3.2. Construction of variables ........................................................................... 70 3.2.1. Dependent variables – Bank risk and performance ............................ 70 3.2.2. Key explanatory variables - Bank diversiﬁcation measures ............... 72 3.2.3. Control variables ................................................................................. 74 3.2.5. The role of financial distress and bank ownership ............................. 76 3.3. Econometric models .................................................................................. 79 3.4. Robustness check....................................................................................... 83 3.5. Conclusion ................................................................................................. 86 CHAPTER 4 EMPIRICAL RESULTS AND DISCUSSION ....................... 87 4.1. Descriptive statistics .................................................................................. 87 4.2. Correlation matrix ..................................................................................... 89 4.3. Empirical results ........................................................................................ 91 4.3.1. Diversification strategies, bank’s risk and performance .................... 91 4.3.2. Diversification strategy combination, bank risk and performance ... 102 4.3.3. Diversification, bank risk and performance during the crisis ........... 105 4.3.4. The role of bank ownership structure ............................................... 109 4.4. Robustness check results ......................................................................... 117 4.5. Conclusion ............................................................................................... 117 CHAPTER 5 CONCLUSION ......................................................................... 118 5.1. Summary of research findings ................................................................. 118 5.2. Contributions ........................................................................................... 119
vi 5.3. Policy implications .................................................................................. 120 5.4. Limitations ............................................................................................... 122 LIST OF PUBLICATION .................................................................................... i REFERENCES ..................................................................................................... ii APPENDIX ......................................................................................................... xv
vii ABBREVIATION LIST ASEAN Association of Southeast Asian Nations BSI The banking stability index CPI Consumer Price Index DEA Data envelopment analysis FOB Foreign-owned bank GDP Gross domestic product GMM Generalized Method of Moments HHI Herfindahl-Hirschman Index JPoD Joint Probability of Distress JSB Joint-stock bank NIM Net Interest Margin NPL Non-performing Loan PB Policy Bank POLS Pooled Ordinary Least Squared RBV Resources Based View SBV State Bank of Vietnam SGMM System Generalized Method of Moments SOB State-owned Bank US The United States of America WTO World Trade Organisation
viii LIST OF TABLES Table 1.1: Descriptive number of banks in Vietnam, 2005-2019 .......................... 5 Table 2.1: Summary of hypotheses associated with research questions .............. 66 Table 3.1: Definition of Variables ....................................................................... 78 Table 3.2: The expected sign of variables ............................................................ 79 Table 3.3: Testing steps for the hypotheses associated with the research question .............................................................................................................................. 85 Table 4.1: Summary statistics of variables .......................................................... 88 Table 4.2: Cross-Correlation Matrix of Variables ............................................... 90 Table 4.3: Empirical results – Using Pooled OLS estimation Method Basic model of the impact of diversification on banks performance and risks ............. 94 Table 4.4: Empirical results – Using Random effects estimation Method Basic model of the impact of diversification on banks performance and risks ............. 96 Table 4.5: Empirical results – Using Fixed effects estimation approach Basic model of the impact of diversification on banks performance and risks ............. 98 Table 4.6: Empirical results – Using SGMM estimation approach The baseline model of the effectiveness of diversification strategies on banks performance and risks .................................................................................................................... 100 Table 4.7: Empirical Results Using SGMM Estimation Approach ................... 103 Table 4.8: Empirical results Using SGMM Estimation Approach .................... 107 Table 4.9: Regression Results Using SGMM Estimation Approach ................. 111 Table 4.10: Regression Results Using SGMM Estimation Approach Diversification, risk and performance of Foreign banks.................................... 113 Table 4.11: Robustness test results .................................................................... 115
ix LIST OF FIGURES Figure 1.1: Diversification indexes of the Vietnam banks from 2005 to 2019...... 7 Figure 1.2: Research procedures ......................................................................... 17 Figure 2.1: Research conceptual model ............................................................... 67
x ABSTRACT Purpose – This dissertation investigates the impacts of asset, funding, and income diversification strategies and their combinations on the banking system’s performance and risk in Vietnam, especially during the financial crisis. The research also evaluates the role of ownership structure upon diversification-risk and performance nexus. Methodology – Using panel data collected from 34 Vietnamese commercial banks from 2005 to 2019, with modern econometrics technique – two-step system GMM estimator method described by Arellano and Bover (1995), are employed to achieve research objectives. The data was collected manually from the bank's audited financial statements, obtained from reliable sources. Findings – The empirical results indicate that, in general, diversification practices in banking sectors are effective in improving banks’ risk-return profile, especially during the financial crisis. However, using them in combinations is only effective for income and funding diversifications. These results are robust regarding the use of alternative measures of diversification level. The results also indicate that this impact varies across different types of bank ownership: State-owned banks, domestic private banks, and foreign banks. Contribution – This dissertation fills the gap in empirical literature by systematically examining the nexus between diversification strategies, bank risk, and performance, conditioned upon financial crisis and ownership structure. In this sense, the findings of this dissertation provide bank managers and regulators important information about the diversification strategy effectiveness to maintain the stability of the banking system and financial market. Keywords: Diversification strategies, bank performance, bank risk, ownership structure, financial crisis, emerging market.
xi TÓM TẮT Mục đích - Mục đích của luận án này là nghiên cứu tác động của các chiến lược đa dạng hóa tài sản, nguồn vốn, thu nhập và sự kết hợp của chúng đối với rủi ro và hiệu quả hoạt động của các ngân hàng thương mại Việt Nam, đặc biệt trong thời kỳ khủng hoảng ngân hàng Việt Nam. Nghiên cứu cũng đánh giá vai trò của cấu trúc sở hữu dựa trên mối quan hệ giữa đa dạng hóa-rủi ro và hiệu suất. Phương pháp luận - Sử dụng dữ liệu bảng thu thập từ 34 ngân hàng thương mại Việt Nam từ năm 2005 đến năm 2019, với kỹ thuật kinh tế lượng hiện đại - phương pháp ước lượng GMM hệ thống hai bước được mô tả bởi Arellano và Bover (1995), được sử dụng để đạt được các mục tiêu nghiên cứu. Dữ liệu được thu thập theo cách thủ công từ báo cáo tài chính hàng năm của ngân hàng, lấy từ Bankscope. Kết quả - Kết quả thực nghiệm cho thấy, nhìn chung, thực tiễn đa dạng hóa trong các lĩnh vực ngân hàng có hiệu quả trong việc cải thiện hiệu quả và rủi ro của các ngân hàng, đặc biệt là trong cuộc khủng hoảng ngân hàng Việt Nam từ năm 2011 đến năm 2014. Tuy nhiên, sử dụng kết hợp các chiến lược chỉ có hiệu quả đối với đa dạng hóa thu nhập và đa dạng hóa nguồn vốn. Những kết quả này rất rõ ràng khi sử dụng các phương pháp đo lường mức độ đa dạng hóa khác nhau. Kết quả cũng chỉ ra rằng tác động này khác nhau giữa các loại hình sở hữu ngân hàng: ngân hàng quốc doanh, ngân hàng tư nhân trong nước và ngân hàng nước ngoài. Đóng góp - Luận án này đóng góp thêm vào các nghiên cứu thực nghiệm bằng cách xem xét một cách có hệ thống mối quan hệ giữa đa dạng hóa, rủi ro và hiệu quả hoạt động ngân hàng, tùy thuộc vào cấu trúc sở hữu và trong từng thời kỳ. Kết quả nghiên cứu của luận án cung cấp cho các nhà quản lý ngân hàng những thông tin quan trọng về hiệu quả của chiến lược đa dạng hóa nhằm duy trì sự ổn định của hệ thống ngân hàng và thị trường tài chính.
1 CHAPTER 1 INTRODUCTION 1.1. Research motivation “In 1952, Nobel Laureate Harry Markowitz demonstrated mathematically why putting all your eggs in one basket is an unacceptably risky strategy and why diversification is the nearest an investor or business manager can ever come to a free lunch. That revelation touched off the intellectual movement that revolutionized Wall Street, corporate finance and business decisions around the world; its effects are still being felt today” Bernstein and Bernstein (1996) The practice of diversification has created conflicting arguments about its impact on the banking sector’s risk and performance. On the one hand, a diversification strategy is motivated by certain advantages that focused banks cannot have: (1) gaining from exploiting managerial skills and abilities across products and geographical areas (Iskandar-Datta & McLaughlin, 2007), (2) taking advantage of economies of scale by sharing fixed costs across various products and markets (Drucker & Puri, 2009), and (3) offering a wide range of financial services to clients who require multiple products. On the other hand, the ones that prefer the concentration strategy claim that diversified banks can reduce their comparative management advantage when investing in many areas they are not experts (Klein & Saidenberg, 1998). Furthermore, diversification increases competition (Winton, 1999) and creates higher agency costs resulting from diminishing value activities when managers reduce their risk (L. Laeven & Levine, 2007). The empirical literature on banking diversification first addresses developed markets, where banks have been fully mature, such as the US market and other
2 developed countries in Europe (Baele, De Jonghe, & Vander Vennet, 2007; Curi, Lozano-Vivas, & Zelenyuk, 2015; Elsas, Hackethal, & Holzhäuser, 2010; Mercieca, Schaeck, & Wolfe, 2007; Stiroh & Rumble, 2006). The research and discussion on this topic in emerging and transition economies are explored (N. Chen, Liang, & Yu, 2018; Moudud-Ul-Huq, Ashraf, Gupta, & Zheng, 2018). However, the literature provides different results for different countries and regions (T. L. A. Nguyen, 2018). According to Doumpos, Gaganis, and Pasiouras (2016), diversification can be more beneﬁcial for banks operating in less developed countries compared to banks in advanced and major advanced countries. Vietnam is one of the fastest-growing emerging markets with significant reforms in both politics and the economy. Nevertheless, Vietnam is still considered a special case study as the country still set itself as a market-driven economy under a socialist regime (Doan, Lin, & Doong, 2018). State-owned enterprises play an exclusive role in the economy, particularly the banking and financial system. The banking sector is always one of the most important factors of all economic systems. In Vietnam, the role of banks is more critical. The Vietnamese financial system has been bank-based, in which the banking industry is considered the bloodstream of the economy (Luu, Nguyen, & Vu, 2019; Vo & Nguyen, 2018). Banks are the main source of short and long-term funding for almost all firms, especially private firms (Tran, Ong, & Weldon, 2015). Typically, the banking system in Vietnam is primarily dominated by State-owned commercial banks1, of which the majority shareholder is the State bank of Vietnam, with over 70% of owner equity. Besides, State-owned commercial banks account for approximately 50% of the market shares, possessing a large customer base, make them less motivated to improve their profitability or efficiency. The core business of 1There are four biggest State-owned commercial banks, including Vietnam Bank for Agriculture and Rural Development, Joint Stock Commercial Bank for Investment and Development of Vietnam, Vietnam Joint Stock Commercial Bank of Industry and Trade, and Joint Stock Commercial Bank for Foreign Trade of Vietnam.
3 Vietnamese banks was concentrated in traditional interest-bearing activities and interbank lending. During the integration phase, especially in 2007, the participation of Vietnam in the World Trade Organization (WTO) and the penetration of 5 foreign banks’ wholly-owned subsidiaries resulted in fierce competition in lending and deposit markets. Consequently, Vietnamese banks are forced to step out of their traditional business models and gradually diversify towards non-traditional activities (Le, 2015; P. A. Nguyen & Simioni, 2015). When the real estate bubble burst in the United States in 2008, the Global economy witnessed a subprime mortgage crisis followed by the global financial crisis (Y. Chen, Wei, Zhang, & Shi, 2013; Demyanyk & Van Hemert, 2009). The world economic growth slowed down while inflationary pressure still increased considerably, challenging central banks' monetary policy. The degree of impact was different depending on the level of integration into the economy. Many economies, especially large economies like the US, Europe, and Japan, suffer severe consequences such as negative economic growth, production and business recall, bankruptcy, and unemployment... The financial market has continuously shown negative signals in this condition, creating negative sentiment for the market and the economy. The underlying cause of this economic catastrophe lies in the credit crunch and the concentration risk in the bank’s credit portfolio. Vietnam was not out of this negative trend. The effects of the global financial crisis on the Vietnamese economy were not so small: limited production and business activities; the value of industrial production has fallen; increase in unemployment and problems with the credit relationship between banks and customers (due to difficulties in the production and consumption of products by companies...). The country has observed a dramatic downturn in all economic indicators since 2009 and became worse in 2011-2014. GDP growth dropped to 4.8% in 2011, the lowest level since 1999, while the inflation rate continuously rocketed out of control, with
4 double-digit inflation since the end of 2010. Moreover, total investment (mostly from the state sector) decreased from around 40% GDP to around 30% GDP in 2011 - 2014 (ADB, 2014). The real estate prices depressed, fueled by sharp increases in the real interest rate and a slowdown in capital flows. Vietnam's economy faced a high trade deficit, and close-to-threshold budget deficit, and public debt. The Vietnamese financial market and banking industry suffered heavily from these conditions. The slowdown trend in credit growth, sharp increases in non- performing loans, and the rise of bad loans were the clear signs that had a significant impact on the activities of commercial banks. Bad loans, lack of liquidity, and poor performance were the main concerns for the entire industry. The Vietnamese bank managers showed several weaknesses, including a lack of capital buffer, poor management skills, and an efficient risk management strategy. The rapid credit expansion without sufficient control of credit and ethnic risk after the Global Financial Crisis (GFC) in 2008–2009 of economic stimulus measures created the asset and credit quality problem for most Vietnamese commercial banks. It was the underlying cause of Vietnam's banking and financial distress from 2011 to 2014 (Do, Nguyen, & Le, 2017). During the credit boom period, due to the concentration risk in the bank’s credit portfolio, the contagion risk within the Vietnamese banking system is also considerably concerned (P. H. Nguyen & Pham, 2020). As a result, the average non-performing loans to total bank capital in the banking system spiked from under 5% in 2011 to nearly 12% in 2012 and about 15% in 2014, according to Fitch Ratings and Moody’s Investor service estimations (Bank, 2014; Sugiyarto, 2015). The number of banks reduced from 52 in 2011 to 43 in 2015 (see Table 1.1) because of many insolvency cases and mergers & acquisitions. A dozen of weak banks were eliminated.
5 In this context, to rescue the whole system out of this challenging situation, the Vietnamese government has decided on a program to restructure the entire banking industry, which was implemented from 2011 to 2015 (Huynh, Nasir, Nguyen, & Duong, 2020; D. P. Nguyen, Ho, & Vo, 2018). Under this program, commercial banks must improve asset quality and gradually diversify their activities into non- credit services instead of relying on credit activities as per Prime Minister Decision No. 254/QD-TTg dated 1 March 2012. Further, since 2016, the State Bank of Vietnam has started requiring the implementation of Basel II, under which there are five classes of assets: corporate, sovereign, bank, retail, and equity (and then sub-classes) (State Bank of Vietnam, 2019). Following the instructions of the Vietnamese government, the banks are starting to carry out more diversification strategies to reconstruct their assets, liabilities, and income quality. Table 1.1: Descriptive number of banks in Vietnam, 2005-2019 2002 2005 2007 2011 2013 2015 2017 2019 State-owned 5 5 5 5 5 7 4 5 banks2 Joint-stock 39 37 37 37 33 28 31 31 commercial bank Banks with 100% 5 5 5 5 5 5 8 9 foreign capital Joint-venture 4 4 5 5 4 3 2 4 bank Total 53 51 52 52 47 43 45 49 Source: State Bank of Vietnam, System of Credit Institutions, 2020 Depending on the current strength and resources, the bank can select various diversification strategies regarding assets, funding, income. The bank uses its resources to expand and diversify its business activities into one or more different 2Note: State-owned commercial banks are banks owned by State Bank of Vietnam, as regulated in the new Corporate Law 2015.
6 areas to limit and disperse risks and increase revenue. The ultimate goal is to increase profits in the relationship between risk control and bank profitability. Conflicting regulations and supervision sometimes prompt the implementation by banks of a diversification or concentration strategy. For example, banks often remain focused due to branch, entry, and investment restrictions. However, some banks may adopt a diversification strategy when their management boards put risk reduction as a high priority. We can also observe the switch from interbank lending before the turmoil and sovereign debt during the 2012 recession to the new trend of consumer loan concentration in recent years (Bezemer & Schuster, 2014). Besides, Vietnamese commercial banks started to divest from different non-core business activities as presented by the decreasing trend in the asset diversification index from 2011 to 2019 (see Figure 1.1). On the other hand, Vietnamese banks increasingly employed diversification strategies for funding sources and income generations, especially during the financial distress period, from 2011 to 2014. They offer more fee-based services such as payment services, card payments, digital banking, etc. Along with these changes, the bank thinks more about investing, trading, insurance, and other non-interest products. Also, in retail banking, which has recently developed, several fee-based products are being introduced in the attachment. We call this the growth of the Vietnamese banking industry (Bezemer & Schuster, 2016). However, this trend towards diversification appears to be a double-edged sword. The skyrocketing of several types of bank fees has sparked negative thoughts about banking. Customers pose several questions about the bank’s transparency. The bank provides several explanations, such as the costs of investment in infrastructure and research and development for more innovative services and products. But concerns remain. To calm the public, the State Bank of Vietnam has
7 proposed restrictions on fee adjustments to avoid excessive fee increases (Bezemer & Schuster, 2014). Conversely, however, the crucial concern of banks and policymakers is whether this move slows down banks' performance. Evidence of failure by managers and bank supervisors has set a problem that must be reconsidered: the nexus between bank diversification, risk, and performance. Figure 1.1: Diversification indexes of the Vietnam banks from 2005 to 2019 Funding diversification Income diversification Asset diversification 0.8000 0.5000 0.4500 0.7500 0.4000 0.7000 0.3500 0.3000 0.6500 0.2500 0.6000 0.2000 0.5500 0.1500 0.1000 0.5000 0.0500 0.4500 - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Own calculation Should banks diversify or focus on those businesses they are familiar with? This question has been attractive to both academics and economists over the past decades. The decision to diversify or focus is discussed at length in the corporate finance literature (Ramanujam & Varadarajan, 1989). However, a conclusion on which strategy is better has not yet been reached. Based on the above motivation, we come to the research problem: After the financial distress and bank restructuring period from 2011 to 2014, Vietnamese banks are reforming to focus more on improving
8 assets, liabilities, and income quality using different diversification strategies. However, the unique characteristics of the Vietnamese banking system post the question about the effectiveness of diversification strategies in improving Vietnamese banks’ performance and risks. Therefore, this dissertation would like to address this problem and contribute to the reforming process of the Vietnamese banking system. 1.2. Research background Having a look at some economic theories, we found some mixed points of view. According to modern portfolio theory, diversification is seen as a solution to solve specific risks. In general, as an old saying goes, "do not put all eggs in a basket," diversification consists of building a portfolio that includes several investments to reduce risk (Fama & Jensen, 1985). Diversification by trying different non- correlated activities, such as interest and non-interest, can benefit banks and eliminate the risk. Banks that operate a large percentage of non-interest activities as a source of income will experience fewer fluctuations in income (Tabak, Fazio, & Cajueiro, 2011; Winton, 1999). This view is consistent with the modern investment theory (Haugen & Haugen, 2001), which believes that banks can share their resources with multiple sectors and avoid the risk of bank failures by diversifying. However, based on agency problem theory, diversification can cause more agency problems, raising agency costs and potential opportunity costs. When managers are overconfident, they can make lousy diversification decisions, which can cause instability in bank performance (Jensen, 1986; Jensen & Meckling, 1976; Montgomery, 1994). Further, because the bank is unique and different from other companies, a promising finding in the general corporate finance literature may not be correct in the banking industry.