Taiwan is an export-oriented economy, indicating that foreign trade has been the engine of Taiwan's rapid growth for the past four decades. Among all, the electronics sector is Taiwan's most central industrial export sector, accounting for sixty percent of the gross export value. There are 383 electronic listed companies in Taiwan.
Electronic listed companies are divided into 8 categories, which include semi-conductors manufacturing, computers and peripheral equipment manufacturing, optoelectronic, communication industry, electronic parts and components manufacturing, electronic channel industry, information industry, and other electronic parts and components manufacturing. The object of study is other electronic parts and components manufacturing.
This section implements the shareholder value methodology with a set of parameter values obtained from 34 Taiwan electronic listed companies5. The data on the parameters used in the empirical model are compiled from Taiwan Economic Journal (TEJ). For each firm we collect quarterly finance reports data for thirteen years, from 2002Q2 to 2014Q4. From the original sample of 34 firms, 5 firms (ELASER6, PT TECH7, CyberPower8, BHI (BizLink)9, VOLTRONIC10) are short of 40 quarterly finance reports because data are not sufficient in TEJ.
In reality, the monthly interest payment d may change due to the change of loan
5 There are originally 35 firms in our category but since the data of KYET is not enough to be convincing we then reject the data
6 39 pieces of data
7 36 pieces of data
8 33 pieces of data
9 24 pieces of data
10 15 pieces of data
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amount, interest rate, and accrual rate. Since it’s hard to estimate the parameter of the constant interest payment d in (16), we will use net income plus depreciation to denote the variable μ − d. Table I and II states for the definition of these variables.
Table II：the definition of the variables Parameters Statistics
R Net income plus depreciation.
Net income is the remains after subtracting all the costs, including depreciation, interest, and taxes from a firm’s revenues. We add depreciation back to denote the net cash inflows.
μ − d Expected earnings(expected net income plus depreciation) σ2 The variance of the net income plus depreciation
R The risk free rate=1.36％(APR).
Since Taiwan bonds are lack of liquidity, we use the 1-year Interest Rate on Deposits of Five Leading Banks11 to represent the risk free rate.
We then run 34 pieces of the series of net income plus depreciation raw data to estimate
the main descriptive statistics, including
the mean (expected earnings μ) and the volatility σ. Putting μ, σ2, and r, into the equations in our empirical model, we can compute the optimal cash reserves. Table II lists the parameters and corresponding definitions we use in our model. The results of optimal cash holdings are shown at Table III.
11 Interest rate on Deposits of five leading banks is the weighted average interest rate on time savings deposits of the following five leading banks: Bank of Taiwan, Taiwan Cooperative Bank, First Commercial Bank, Hua Nan Commercial Bank and Chang Hwa Commercial Bank.
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Table III：the definition of the parameters Parameter Definition
Mc The amount of cash and cash equivalents reported on the balance sheet.(in thousands)
Mq The sum of the amount of cash and cash equivalents, short-term investment, accounts receivables, and other receivables.12 (in thousands)
M∗ The optimal cash reserves (in thousands)
Table III summarizes the results of the cash and cash equivalents held in firms and the optimal cash reserves computed by the shareholder value function. The Mc to M∗ratio are rounded off to the third decimal place. We use the Mc to M∗ratio to see if the firm is in good liquidity management condition. Based on our theory, over two third of the companies hold back the cash more than the optimal reserves they actually need. In the contrast, twelve companies’ Mc to M∗ ratios are below one, meaning that they should keep more money in reserves for precautionary reasons, especially HUXEN and Kinpo. This may also implies that the firm won’t pay dividends until the cash reserves cumulated to a certain level. In all, it’s safe to drop the conclusion that some of the firms keep too much cash, which indicates the excess money should pay out as dividends, buyback stocks from their shareholders or invest in other projects that have NPV> 0. The reason why we list the amount of Mq is because Mq contains lots of quick assets, which can also be seen as cash equivalents sometimes.
12 Those assets altogether are known as quick assets, which are easy to be sold and turned into money.
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2 2317 HON HAI 679,037,301 1,501,815,861 184,358,850.90 3.683 3 2354 FTC 35,253,120 72,948,621 15,149,332.38 2.327‧ 國
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In our empirical model, we show two cases of shareholder value, one with liquidation value and the other without. We then provide trading strategies based on our statistics to see if the shareholder value function help for determining the real value of the market’s true worth.
Case A:
Shareholder value was computed by Mc.
V(M) = e βMc− e αMc
βe βM∗− αe αM∗ (29)
For comparison, we divide shareholder value by the number of shares outstanding, that is V(Mc) per share is equal to V(Mc) divided by numbers of shares outstanding. Table IV summarizes the comparison of estimates to actual share price on 2015/05/14. Previous results have shown that most of the firms hold excess cash. Since the shareholder value is a function of cash reserves, we expect the V(Mc) per share is greater than the share price.
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Table V：the comparison of V(Mc) per share and share price on 2015/05/14
# stock
13 The closing price on 2015/05/14
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33 8021 Topoint 175.524 27
34 8201 BESTA 12.344 11.9
Using the data collected from stock AURORA, we draw mathematical graphs as shown in Figure I. It shows that shareholder value is an increasing function of cash reserves. Case A is under the assumption that when cash flows fall to zero, the firm is liquidated. Therefore, when M0≤ 0, the marginal value of cash is zero. Though the shareholders lose all their investment, they are protected from liability for the acts of the firm.
Figure I：the shareholder value function (without liquidation value)