Impact of Diversification on Bank Risk Taking: Moderating Role of Corporate Governance

Abstract

The paper explores the effects of diversification on banks' risk taking while also examines how corporate governance moderates this relationship. This research employs sample of listed banks from Asian emerging economies and gathers data from annual reports of banks and DataStream for the period of 2012 to 2022. The data in this research was analyzed using a two-stage dynamic panel system GMM, descriptive statistics, multicollinearity diagnostic tests, and correlation analysis. Overall findings of the study show that diversification, whether income or assets significantly related to banks' risk-taking. Income diversification reduces banks' risk-taking while asset diversification is detrimental to financial stability. Furthermore, female board members moderate the relationship between diversification and bank risk-taking in Asian emerging countries. The findings suggest that the current study is helpful for managers, regulators, policymakers and researchers. Policymakers should make appropriate risk-taking decisions while considering factors such as diversification.