Motivation and Purpose

Many studies consider the strategic incentives of a product’s market power when examining the effects of market share, and market share is a frequently identified goal of corporate management (Mueller, 1983). Firms focus on market share in order to increase shareholder value through improved efficiency score, thereby benefiting consumers. Goldberg and Rai (1996), Smirlock (1985), Peltzman (1977) and Demsetz (1973) note the correlation between market share and profitability. Hannan (1991) considers the greater efficiency score of firms with larger market shares to be a source of the positive relationship between profits and concentration. Goldberg and Rai (1996) develop the efficient-structure (EFS) hypothesis which suggests that efficient firms increase in terms of their size and market share due to their ability to generate higher profits, thus leading to a higher degree of market concentration. Smirlock (1985) includes market share as an independent variable that is positively and significantly related to profitability even after controlling for concentration. However, Goldberg and Rai (1996) and Shepherd (1986) indicate that the conclusion depends on whether market share can be regarded as a proxy for the efficiency score of larger firms rather than as a measure of their market power. Martin (1988) shows how larger firms have lower costs due to the economies of scale in their industries or because of their inherent superiority within their respective industries. The larger firms have price-cost margin advantages over their smaller rivals. Based on the above literature, this

study considers the restriction imposed by constant output in investigating the relationship between the market share and the efficiency score.

Blundell et al. (1999) point out that total industry profits decrease when more firms share the market. The dominant firms tend to innovate more and industry evolution is characterised by their persistent dominance. In the securities industry, investors at large discount brokerages using personal computer-based trading tend to trade more actively. Barber and Odean (2001) have strongly suggested that there is a link between the Internet and increased trading. Guerrero et al. (2007) examine how banks use Internet banking to lower costs and increase their income by attracting new customers and increasing sales to current customers.

The securities industry in Taiwan has become increasingly competitive, especially following the establishment of financial holding companies (FHCs) in 2003. The regulatory authority in Taiwan has repeatedly encouraged domestic financial institutions to form into FHCs. The main purpose of forming an FHC is to create bigger and stronger financial conglomerates that are capable of competing with international financial groups and gain a foothold on the worldwide financial market. Accordingly, the Taiwan government enacted the Financial Holding Company Act in 2001 and permitted only integrated securities firms (ISFs) to join as FHC’s subsidiaries. As a consequence, law-induced FHCs in Taiwan provide the opportunity to assess the impacts on the managerial efficiency of their securities subsidiaries. Table 1-1 lists fourteen FHCs in Taiwan.

TABLE 1-1. 14 FHCs Establishment in Taiwan

FHC Registered

Date

ISF as its Subsidiary Joined Date

First 2003/1/2 First Taisec 2003/7/31

Chinatrust 2002/5/17 Chinatrust 2002/5/17

SinoPac 2002/5/9 SinoPac 2002/5/9

Waterland 2002/3/26 Waterland 2002/3/26

Shin Kong 2002/2/19 Shin Kong 2002/2/19

Taishin 2002/2/18 Taiwan 2003/1/1

Jih Sun 2002/2/5 Jih Sun 2002/2/5

Fuhwa 2002/2/4 Fuhwa 2002/2/4

Mega 2002/2/4 Mega 2002/2/4

E. Sun 2002/1/28 E. Sun 2002/1/28

Cathay 2001/12/31 Cathay 2004/5/12

China Development 2001/12/28 Grand Cathay 2002/11/8

Fubon 2001/12/19 Fubon 2001/12/19

Huanan 2001/12/19 Huanan Entrust 2002/11/14

In other words, the environment in Taiwan is close to one with zero-sum gains (Lins et al., 2003) in which securities firms (SFs) expand their market share within a 100% constraint. Tracy and Chen (2005) significantly improve existing data envelopment analysis (DEA) models by providing a methodology for weight restrictions. In addition, Lins et al. (2003) introduce a zero-sum gains data envelopment analysis (ZSG-DEA) model, in which the sum of the outputs is

constrained, in order to assess the ranking of participating countries in the Sydney 2000 Olympic Games based on single aggregated medals. With these developments in mind, this research proposes a framework to apply this ZSG-DEA model to the study of the securities industry that is based upon the maximisation of market share.

Since efficiency is an important topic in banking and finance, there have been numerous related studies (Camanho and Dyson, 2005; Chong et al., 2006; Drake and Hall, 2003; Drake et al., 2006). However, very few studies have paid attention to the securities industry’s efficiency. There are still several important securities issues that need to be further explored.

First, while market share is a frequently identified goal among market players, the literature seldom considers the pursuit of market share, and also neglects the zero-sum gains restriction. The development of the performance evaluation under zero-sum gains deserves further careful study. This research therefore applies this model of maximising the market share to analyse the competition among SFs in Taiwan.

Second, many studies use the DEA model to compute technical efficiency.

However, empirical studies rarely investigate the relationship between the market share and the efficiency score. The research thus studies the simultaneity between the market share and the efficiency score using the two-stage least squares procedure (2SLS) proposed by Heckman (1978). Martin (1979) indicates that advertising intensity, seller concentration, and profitability are simultaneously determined.

Brockett et al. (2004) recommend the use of simultaneous-equation estimation methods to examine the endogeneity of joint advertising and other variables in future

studies. O’Brien (2002) employs 2SLS simultaneous equations systems to test whether expenditures and votes are simultaneously determined. Daneshvary and Clauretie (2007) examine the effect of employer-provided health insurance on the annual earnings of married men and married women and account for the endogeneity of the health insurance decision using 2SLS.

Moreover, a comparison of the operating efficiency between foreign-affiliated and domestic SFs has seldom been empirically investigated. In order to accelerate the internationalisation and liberalisation of the domestic capital market, the Ministry of Finance in Taiwan launched ISFs in May 1988. Foreign securities firms were subsequently permitted to set up branches in Taiwan in 1989. At the end of 2005, a total of 11 foreign securities firms had set up branches in Taiwan. Advanced technology accompanies foreign direct investment entering the host country, thereby making foreign firms more efficient than their domestic competitors (Dimelis and Louri 2002). Feinberg (2001) indicates that 94.1% of households use domestic financial institutions as their primary provider of financial services in the U.S.

Deyoung and Nolle (1996) find that foreign banks are less profit-efficient than U.S.

banks. This research also investigates the impact of a foreign ownership structure on the efficiency score of SFs in a small open economy, namely, Taiwan. We define the foreign-affiliated SFs as those branches of multinational SFs in Taiwan since 1989, in contrast to the domestic SFs.

Meanwhile, the issue of whether or not FHCs parent companies can effectively improve an ISF’s managerial efficiency is still not empirically studied. The lack of firm-level data has made research on securities firms very difficult and rare to see (Goldberg et al., 1991), not to mention the effects of FHC on their managerial

sectors of the Fried et al. (1999) approach to adjusting inputs of DEA for incorporating with the impact of environmental factors. This research also investigates the influence of the law-induced FHC on its securities subsidiaries in terms of managerial efficiency.