Geographic diversification and bank efficiency: Evidence from China's commercial banks

With increasing financial market globalization and regional economic integration, geographic diversification has become a critical strategy for commercial banks to expand their business, diversify risks, and enhance competitiveness. This study constructs a comprehensive efficiency evaluation system, encompassing both cost and profit efficiency, to assess the impact of geographic diversification on the performance of China's commercial banks and to elucidate its underlying mechanisms. Empirical findings reveal that geographic diversification significantly reduces banks' profit efficiency, but leaves cost efficiency unaffected, a conclusion that remains robust after a series of endogeneity and robustness tests. Mechanism analysis indicates that the deterioration in loan quality management, exacerbated principal-agent problems, and heightened information asymmetry serve as key channels through which geographic diversification impairs profit efficiency. This paper provides novel empirical evidence on the potential inefficiencies arising from the excessive expansion of commercial banks, offering important theoretical underpinnings and practical guidance for banks to formulate scientific business strategies, optimize resource allocation, and mitigate the negative consequences of unchecked geographic diversification.