Does diversification promote risk reduction and profitability raise? Estimation of dynamic impacts using the pooled mean group model

Abstract

This paper utilizes the pooled mean group model to explore the dynamic effects of revenue diversification on the operational risks and profitability of banks. The sample consisted of unbalanced panel data of 25 listed Taiwanese banks for the period from 1998 to 2013. The results reveal a divergence in the long- and short-run effects of revenue diversification on credit risk by the banks, and the benefits of diversification on two other operational risks and profitability are deferred. This paper provides dynamic evidence of diversification, which has been typically evaluated in previous studies, to release the aggregate effect and to explain the ambiguity in the results in the current literature.