قدرت نفوذ، عملکرد و نسبت کفایت سرمایه در صنعت بانکداری تایوان

We examine the relation between firms’ financial structures and their risky investment strategies in Taiwan's banking industry. Regressions cover two subperiods: before the first financial reform (1996–2000) and after the first financial reform (2001–2006), to address the impacts of the first financial reform on banking firms’ financial structures. Our first result demonstrates that the restrictions on CAR have indeed affected firms’ risky investment strategies, as market share and leverage are positively related. Second, the firm performance is significantly and positively related to firm size, leverage and financial cost. Finally, the regression results show that financial structures for banking firms are positively related to the states of business cycle (i.e., cyclical). The positive signs coincide with Proposition 4 in our analytical model.

The existing literature such as Brander and Lewis (1986) has examined the impact of oligopolistic firms’ financial structures on their competition in the product market. It is concluded that a firm can use “debt” to commit to an aggressive output level and induce a favorable output reduction from its rival. However, as pointed by Doherty (1989), this line of research addressed the financial structure issue under the assumption that the firms’ financing decisions are predetermined and separable from its operating decisions. “This convenient separating of financing and operating decisions is inappropriate for financial intermediaries”. For example, debts in banks usually consist of deposits with various maturities; new depositors can join in or early withdrawal can occur when depositors remove their money for better returns elsewhere (see Diamond and Dybvig, 1983). Sealey (1983) also pointed out that similar issues arise for insurance firms. The sale of insurance policies generates the operating revenues of the insurance firms. Although these debt like instruments are sold in the insurance product market (rather than in the capital market), these afford the firm as a source of capital. The insurance “debt” issued by the insurers is used to construct a portfolio consisting of mostly of financial assets. These suggest that unlike other industries, debt levels in the banking industry will actually change with firms’ current revenues and hence cannot be predetermined before competition. Our paper will incorporate these observations in an imperfectly competition framework similar to Brander and Lewis (1986); two firms simultaneously choose their equity levels (rather than debts) in the first stage, and then decide how to allocate their capital between cash flow reserve and risky investment which is subject to the rival's competition. We assume instead that debt level is an increasing function of current revenue and will be determined endogenously with the operating decision. We will consider the possibility that too many early withdrawal might cause the firms go bankruptcy, and the impacts from the capital adequacy ratio (henceforth, CAR) requirement by Basel I and Basel II Accords (1988, 2004). We ask the same questions as in the existing literature but focus on the banking industry: How will banking firms’ financial structures affect their risky investment decisions? How will firms’ financial decisions change with the business status? What is the impact from the CAR requirement? Assuming debt to vary with firms’ current revenues and taking equity as the control variable for financial structure give us a different aspect to examine the impact of firms’ financial decisions. In Brander and Lewis (1986), increasing debt has two impacts on firm value: to decrease the critical value of shock (representing the uncertain demand) and to increase the debt repayment. Since debt is predetermined before competition, the repayment will not affect firms’ output levels. The only impact on the critical value of shock is to lift up the expected demand, increase marginal revenue, and increase output and profit. Hence, debt financing can commit a firm to an aggressive output stance. In our model, the equity level will be set prior to the risky competition. Equity issuing has three impacts on firm value. First, higher equity level can increase a firm's cash flow reserve, which also decreases the critical value of shock. The former increases the firm value directly and the latter will lift up the expected demand and marginal revenue, and also increase risky investments and returns. Second, higher equity level means more dividends to give away to equityholders, and this will decrease the marginal revenue, their investments and returns. The third impact is on the debt repayment, indirectly through its impacts on the return and the debt level. For the combination of the three effects, Proposition 3 concludes that equity issuing will decrease firms’ equilibrium risky investments, showing the domination of the latter two impacts. Proposition 4 also demonstrates that the equilibrium equity level is higher in a better business status. Finally, Basel I and Basel II Accords (1988, 2004) suggested that banking firms should follow a minimum risk-based capital requirement that the CAR be at least greater than 8%. Proposition 5 shows that if the CAR requirement is binding, then the result from Proposition 3 will be overturned and the equilibrium risky investment will be positively related to equity level. This gives us an alternative interpretation for the empirical tests on banking industry: if the risky investment or return is negatively related to equity level, then the CAR requirement is not effectively binding; otherwise, the CAR requirement is binding and firms’ risk managements are affected. We then test our theoretical results using panel data from Taiwan's banking industry. Our research is the first attempt to cover Taiwan's four core financial businesses:1 banks, securities firms, property insurance firms and life insurance firms. We present the regression results for before the first financial reform (1996–2000) and after the first financial reform (2001–2006), to examine the impacts of the first financial reform on banking firms’ financial structure. Our results first justify our theoretical assumption that debts are increasing function of firms’ returns. Next, as described by Proposition 5, the restrictions on CAR have indeed affected firms’ management strategies, as market share and leverage are positively related. The firm values are significantly and positively related to firm size, leverage and financial cost. Finally, the regression results show that financial structures for banking firms are positively related to the states of business cycle (i.e., cyclical). The positive signs coincide with Proposition 4 in our analytical model. Section 2 describes a two stage game where two firms simultaneously choose their equity levels first, and then allocate their capital between cash flow reserves and risky investments, which are subject to the rival's competition. Section 3 provides the empirical tests of our theoretical results using data from Taiwan's banking industry. Section 4 concludes the paper.

This paper incorporates the observation that in the banking industry, debts are usually affected by current revenues and cannot be predetermined before competition. In a portfolio choice model, we have analyzed how two firms sequentially decide their financial structures through choosing equity level, and then the level of risky investment which is subject to the rival's competition. Taking equity as a control variable gives us a different aspect to examine the impact from firms’ financial decisions; in addition to the impact on the critical value of shock from uncertain demand, the firms’ financial decisions also affect firms’ cash flow reserve, as well as the costs paid to equityholders and debtholders. Our main results show that leverage is positively related to a firm's revenue; however, when the CAR requirement is binding, this result will be overturned. This gives us a convenient approach to check if the firm's risky investment strategy is restricted by the CAR requirement, by testing the relationship between firm's financial structure and risky investment. Our theoretical results are tested using panel data from Taiwan's banking industry. Our research is the first attempt to cover Taiwan's four core financial businesses: banks, securities firms, life insurance firms and property insurance firms. The first result agrees with Proposition 5 that the restrictions on CAR have indeed affected firms’ management strategies, as market share and leverage are positively related. Second, firm values are significantly and positively related to firm size, leverage and financial cost. Finally, the regression results show that financial structures for banking firms are positively related to the states of business cycle (i.e., cyclical). The positive signs coincide with Proposition 4 in our analytical model.