Geographic diversification results in the improvement of firm value through an increase in scale and scope of economies, gains in synergy, reduction in cost and improved corporate governance, however, the capabilities of financial institutions get heavily affected due to information asymmetries, varied macro and microeconomic factors across economies. In this context, the purpose of this paper is to empirically analyze the impact of geographical diversification on the performance of Indian Banks.
For an unbalanced panel data set of Indian Banks over the period 2001–2016, fixed effect model (FEM) with a distributed lag is used and tested for firm and time fixed effects. Further, the study also examines the role of bank size and ownership on the above association.
Findings of the study suggests that geographical diversification helps in increasing bank returns for the overall sample but does not have any significant impact on bank risk. For foreign and public banks, geographical diversification helps in increasing bank returns but does not have any significant impact on bank risk. This indicates toward the adverse selection, poor monitoring incentives in new markets and suggesting a lack of managerial skills.
The study indicates that while formulating the policies regarding branching and expansion these findings can serve as a guiding tool for managers and regulators. Findings have important implications for financial institution and policymakers in globalized financial markets.
