Evaluating the effects of profits made through asset diversity on the efficiency criterion of banks

Document Type : Research Paper

Authors

1 Associated professor of economics, Faculty of Economics, management and commerce, university of Tabriz, Iran

2 Ph.D. student in economics, university of Tabriz

Abstract

According to the role of the banks in the economy of a country, it is important to study their performance and efficiency. Bank decisions about diversification have significant effects on its performance. By prorating fixed costs, minimizing expected bankruptcy costs and improving resource allocation, diversification can bring revenues for the banking sector. These revenues are called diversification profits. The profits have significant effects on bank efficiency and risks.  In order to investigate the effects of diversification profits, this paper estimates a non-linear cost function for some chosen banks of Iran during the period of 2006-2017. Introducing a new method, quasi-diversification profits are extracted in the form of four scenarios. Then, using a censored regression pattern (Tobit method), the effects of those profits on the efficiency of the banks are investigated. The results indicate that the relationship between quasi-diversification profits and bank efficiency depends on the scenarios in which those profits are extracted.

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Main Subjects

References

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The Journal of Economic Policy
Volume 11, Issue 22
March 2020
Pages 159-190

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