Board size, Diversification, Performance and Stability:

Litterature Review

Developed by: Supervised by:

Nour Alouane Dr. Samira
Haddou

University Years:
2022/2023
 Plan

Introduction

Research questions

Theoretical foundations

Methodology

Previous results

Conclusion
 Introduction

Revenue
diversification

Performance Risk
 Corporate
Governance

Performance Risk

Revenue
diversification
 Research Question

How do board size

What is the nature of
moderate the
relationship between
association between
diversification
diversification,
strategy, financial
financial
performance and
performance and
stability ?
stability?
 The concept of revenue diversification

 Non-traditional activities have become an additional

contributor to bank revenues and have also become an
important factor that determines bank performance and risk
taking. This income is understood as income generated by
banks from sources other than interest payments, the most
common examples of which are service fees such as ATM
fees and loan origination fees (Haubrich and Young, 2019).
It result also from underwriting and trading securities,
broker-agent, and investment banking, and other activities
that generate non-interest income (Meslier et al, 2014).
 Revenue diversification versus bank
performance

 Ahamed (2017) investigates whether a shift toward non-

interest income activities improves the profitability of
Indian banks. He showed that an increased share of non-
interest income increases the profitability of Indian banks.
In other words, a greater diversification of revenue in the
form of non-interest income enhances bank profits and
risk-adjusted profits. Also, he showed that higher share of
non-interest income yields higher risk-adjusted profits
when banks are involved in more trading activities.
 Portfolio Theory

Portfolio theory is the most widely used theory to describe

the diversification activities of banks. It is developed by
Markowitz in 1952. It proposes that increasing the
proportion of non-interest income can lead to a potential
reduction in bank risk.
 Revenue diversification in the Tunisian banking
market

Source: Tunisia | World Bank Development Indicators

Hamdi et al (2017) argued that Tunisian banks until the year 2015 continued to
rely on traditional balance sheet intermediation activities, despite reforms aimed at
encouraging banks to develop market activities and provide more personalized
services to customers.
 Resource-based theory

Directors’ knowledge, experience, education, and

expertise are essential sources of competence and
capabilities, which contribute to firm performance
Kim et Rasheed (2014): when a firm pursues growth
by implementing diversification strategies, board
directors are often seen as important resources. So,
directors from the board are expected to evaluate the
strategy of diversification holistically, considering its
business scope, risks, and consequences for the
performance of the firm.
 For Jensen (1993), a medium-sized board (of seven or eight
members) would be more efficient because it would allow for
faster decision-making and lower agency costs through better
coordination. As the size and complexity of the firm increases,
the need for expertise is greater, which is an organizational
response to the firm's environmental requirements. Therefore, a
higher number on the board of directors may be justified as it
would allow for the representation of different stakeholders.
Chen Zheng and Henry Tsai (2019): an increase in board size
may heighten the possibility of agency problems in decision-
making processes.
H1 : Board size positively moderates the relationship
between diversification and bank performance.
Chen Zheng and Henry Tsai (2019): an increase in
board size leads to an increase in coordination and
information-sharing costs and exacerbates cooperation
problems (increasing competition for internal resource
allocation) when firms pursue related diversification.

H2 : Board size negatively moderates the relationship

between diversification and bank performance.
 Methodolgy

• the ten Tunisian banks listed on the Tunis Stock

Sa
m Exchange (BVMT)
pl
e

D • Professional Association of Banks of Tunis, Annual

at Reports, Central Bank of Tunisia
ab
as
e
• Dependant variables: ROA; Z-score
Va • Independent variable: Board Size
ri
ab
• Control variables
les
 Conclusion
 The interest is justified by the gap observed on
relationship investigation between diversification,
risk and performance of banks in Tunisia.
 The insufficiency of empirical studies exploring
the system of governance and the design of boards
of directors in Tunisia encourages us to explore its
moderating role in relation to the diversification
strategy, financial performance and stability.
 Tunisian banks tend to engage in more
diversification activities when the degree of market
competition increases which make banks less
instable and more efficient.

 It is also anticipated that a well-organized board

of directors will improve revenue diversification in
Tunisian banks.