This study examines the entrenchment effect of the diversification in terms of the agency cost of the controlling shareholders. Banks should concentrate their assets on loans and other earning assets to reduce risk and enhance their performance. The results of bank revenue diversity show significant diversification premium even though non-interest income increases bank risk. The study elaborates the importance of the ownership concentration to the diversification strategy of the banks in the world. Taking internal corporate governance into consideration, controlling shareholders of the banks with high concentrated ownership structure expropriate minority shareholders’ benefits by increasing the degree of asset diversification, especially by increasing the loan and other earning assets. This result supports the entrenchment effect. After controlling the level of ownership concentration and the external factors of corporate governance, higher market competition, higher official supervisory power and higher activities restriction are the effective external monitoring mechanisms to reduce the entrenchment effect of concentrated controlling shareholders of the banks. After controlling internal and external corporate governance, this study finds that because managers have no incentive to operate actively, the bank in weak external product competition market will bring diversification discount. Overall, corporate governance issue plays an important role on bank performance.
