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Entropy 2018, 20(4), 255; https://doi.org/10.3390/e20040255

Does Income Diversification Benefit the Sustainable Development of Chinese Listed Banks? Analysis Based on Entropy and the Herfindahl–Hirschman Index

School of Economics and Management, Beihang University, Beijing 100191, China
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Received: 26 February 2018 / Revised: 30 March 2018 / Accepted: 4 April 2018 / Published: 6 April 2018
(This article belongs to the Section Statistical Mechanics)
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Abstract

We collected data pertaining to Chinese listed commercial banks from 2008 to 2016 and found that the competition between banks is becoming increasingly fierce. Commercial banks have actively carried out diversification strategies for greater returns, and the financial reports show that profits are increasingly coming from the non-interest income benefits of diversification strategies. However, diversification comes with risk. We built a panel threshold model and investigated the effect of income diversification on a bank’s profitability and risk. Diversification was first measured by the Herfindahl–Hirschman index (HHI), and the results show that there is a nonlinear relationship between diversification and profitability or risk does exist. We introduced an interesting index based on the entropy to test the robustness of our model and found that a threshold effect exists in both our models, which is statistically significant. We believe the combination of the entropy index (ENTI) and the HHI enables more efficient study of the relationship between diversification and profitability or risk more efficiently. Bankers and their customers have increasingly been interested in income diversification, and they value risk as well. We suggest that banks of different sizes should adopt the corresponding diversification strategy to achieve sustainable development. View Full-Text
Keywords: commercial banks; Herfindahl–Hirschman index (HHI); entropy index (ENTI); profitability; risk; income diversification; threshold effect commercial banks; Herfindahl–Hirschman index (HHI); entropy index (ENTI); profitability; risk; income diversification; threshold effect
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).
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Jiang, H.; Han, L. Does Income Diversification Benefit the Sustainable Development of Chinese Listed Banks? Analysis Based on Entropy and the Herfindahl–Hirschman Index. Entropy 2018, 20, 255.

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