4. Empirical Results
4.2 Profitability/Marketability Efficiency and Diversification Type
For further investigations, FHCs are split into groups of ‘predominantly related diversifiers’
and ‘predominantly unrelated diversifiers.’ Fourteen FHCs in our sample are divided into four groups. FHCs with above median related diversification and below median unrelated diversification are classified as ‘predominantly related diversifiers.’ FHCs with below median related diversification and above median unrelated diversification are marked as ‘predominantly unrelated diversifiers.’ These two groups consist of four FHCs each. (The FHCs with both related and unrelated diversification below median are non-diversifiers. The FHCs with both
related and unrelated diversification above median are neither predominantly related diversifiers nor predominantly unrelated diversifiers. FHCs belong to these two types are omitted for further analyses.)
A cross-tabulation is presented in Figure 4 to illustrate a FHC’s relative position on related-unrelated diversification and the interaction with profitability/marketability efficiency score.
Fourteen FHCs fall into four quadrants following the above classification rule. Compared to unrelated diversifiers, related diversifiers result in superior performance in profitability efficiency:
The group mean of related diversifiers is 0.861, which is higher than that (0.500) of unrelated diversifiers. The rational for this empirical result is that whereas diversified FHCs can transfer skills from one business to another and promote resources-allocation-and-sharing merits, related diversification seems to have a better chance to accomplish this as suggested by Rumelt (1982) and Salter and Weinhold (1979). Firms pursuing related diversification may also realize economic benefits from the exploitation of interrelationships between divisions based on functional specialization such as production, marketing, and purchasing (Porter, 1985; Teece, 1982).
On the other side, the group mean of marketability for predominantly related diversifiers is 0.599, which is marginally greater than that (0.458) of predominantly unrelated group. The possible managerial interpretation can be found from the perspective of investors. Since the term
‘FHCs’ is fresh new to investors in Taiwan, which is comparatively a small economy, any good news in earnings will excite the financial market considerably. Investors react to earnings with greater altitude for those FHCs with various business-line or financial products (predominantly unrelated-diversification) than related-diversified FHCs, even though these predominantly unrelated diversifiers may perform inferior in profitability efficiency. This phenomenon shows that from the standpoint of investors, they are willing to put more emphasis on the synergy effect for a FHC which expands its business in the direction of multiple-development, or a ‘warehouse-sale’ strategy.
[Insert Figure 4]
5. Conclusions
Diversification does not guarantee a successful path to higher performance, and the financial service industry is no exception. As FHCs and their customers enjoy the benefits of cross-selling, these FHCs are facing various markets, operational risks, and integrating difficulties. Although the global trend of the financial conglomeration has opened up a new battle field in cross-industry business, there are still some important issues less touched upon in the previous literatures: First, the ignorance to treat the provider of financial services as a whole, such as a FHC. Second, the
27
relationship between diversification and performance lacks investigation under the global conglomeration trend. Third, an evaluation model based both on accounting and market basis concerning the value-creating process of a financial-services provider. This paper therefore aims to measure the degree/type diversification for the FHCs in Taiwan, and relates to their profitability/marketability efficiency.
A two-stage model using DEA techniques for FHCs’ efficiency is applied to study the FHCs in Taiwan. Our findings can briefly be concluded as follows: Firstly, profitability efficiency of low-degreed diversifier is greater than that of high-degreed ones in terms of diversification degree.
This result is consistent with the previous literature while applying in other industries. That more diversified FHCs appear to perform poorly indicates that the rising complex of activities erode the profitability efficiency in the initial stage. Secondly, the related diversifiers perform better in profitability model than the unrelated diversifiers. This suggests that FHCs that diversify into similar activities can use same of their existing skills and hence might have a comparative advantage in these activities, whereas FHCs that diversify into unrelated activities might not have such an advantage and hence might perform poorly. Thirdly, the group of unrelated diversifiers performs marginally better in marketability model than the group of unrelated diversifiers. This result indicates that investors in the financial market are willing to put more emphasis on a FHC with diversification strategy on multiple product line. In summary, we find that the relationship between diversification strategy and a FHC’s performance is not only one-facet, it depends on degree or type of diversity as well as the perspectives from profitability or marketability efficiency.
Any news in profitability of FHCs can excite investors in the stock market, especially for those FHCs with unrelated-diversification. However, better marketability does not necessarily mean higher profitability. The findings in this study can be explained by the reflection of the investors’
subjective opinion that ‘good news in earnings, no matter how tiny, means that a successful synergy is accomplished by mergers across financial industries, especially for “all-we-can-sell” ones.’
These ones may perform inferiorly on profitability efficiency in reality. Back to the base point, both profitability and marketability efficiency are the keys for a FHC’s successfulness and healthiness.
Although the history of FHCs in Taiwan is quite short compared with other industrialized countries, this issue on the field of service industry cannot be ignored under the global financial trend. This article can serve as a spur in the financial service industry for coping with the diversification issues relating to the performance of financial holding companies. Time series data is not included, because the history of FHCs in Taiwan is really short, therefore, a further investigation would be the examination of performance over time (panel data) in due course. The
models and methods used in this study are hoped to bring about other related researches.
29
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Figure 1.
The Value-Creating Process of FHCs
Figure 2.
Profitability and Marketability Efficiency Models for FHCs (Adopt and modified from Seiford and Zhu, 1999)
Figure 3.
Diversification Degree versus Profitability / Marketability Efficiency
► Cross-selling
► One-stop shopping
► Single customer relationship
► Credibility and branding
Product Diversification FHC Operating Perspective Financial Perspective Capital Market Perspective
► Shared infrastructure
► Shared technology
► Cost-saving
► Diversified earnings
► Higher profit
► Higher returns (ROA, ROE)
► Market value
33 0.00
0.20 0.40 0.60 0.80 1.00
Profitability Marketabiility Diversification (Herfindahl)
Average Efficiency
Low High
0.00 0.20 0.40 0.60 0.80 1.00
Profitability Marketabiility Diversification (Entropy)
Average Efficiency
Low High
Figure 4.
Related-Unrelated Dimensions and Profitability-Marketability Efficiency for FHC
Related Diversification High
High
Low
Low
Related Diversifiers Unrelated Diversifiers
．01 Cathay
．04 Mega
．08 Taishin
．10 E.SUN
Group Mean of
Profitability Efficiency = 0.861 Marketability Efficiency = 0.458 Unrelated
Diversification
．05 First
．07 Hua Nan
．09 SinoPac
．12 China Development
Group Mean of
Profitability Efficiency = 0.500 Marketability Efficiency = 0.599
．03 Fubon
．11 Fuhwa
．13 Jihsun
．02 Shin Kong
．06 Chinatrust
．14 Waterland
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Table 1
Descriptive Statistics for the 14 FHCs in Taiwan
Mean Std. Dev.
Assets (NT$100 million) 9007.31 6875.79 Equity (NT$100 million) 742.39 482.54
Employees 8308.50 8087.78
Revenues (NT$100 million) 911.13 1371.14 Profits (NT$100 million) 50.67 96.80
EPS (NT$) 1.07 1.38
Market Value (NT$100 million) 1343.66 1157.06 Stock Price (NT$) 22.64 11.19
Table 2.
Correlation Coefficients among Inputs and Outputs
Assets Equity Employees Revenues Profits EPS Market Value
Stock Price
Assets 1.0000
Equity 0.7276 1.0000
Employees 0.7641 0.4531 1.0000 Revenues 0.7037 0.4573 0.9784 1.0000
Profits 0.5600 0.4339 0.5413 0.5432 1.0000
EPS 0.2163 0.0700 0.3684 0.3913 0.8645 1.0000
Market Value 0.8230 0.9079 0.7475 0.7500 0.4999 0.1813 1.0000
Stock Price 0.8141 0.6269 0.8469 0.8110 0.5535 0.3870 0.8546 1.0000
Table 3
Efficiency and Diversification Scores of FHCs
Efficiency Diversification
Degree Type
No. FHC Profitability Marketability Herfindahl Entropy Related Unrelated 01 Cathay 0.987 0.084 0.153 0.333 0.111 0.222 02 Mega 1.000 0.158 0.006 0.022 0.000 0.020 03 First 0.884 0.209 0.691 1.249 0.456 0.793
04 Hua Nan 0.954 0.259 0.452 0.893 0.326 0.567 05 Fubon 0.473 0.400 0.436 0.703 0.013 0.691 06 Chinatrust 0.677 0.454 0.049 0.117 0.000 0.117 07 Shin Kong 0.503 0.420 0.391 0.754 0.085 0.666 08 Taishin 0.525 0.487 0.283 0.521 0.121 0.400 09 SinoPac 0.547 0.577 0.413 0.604 0.000 0.604 10 E.SUN 0.978 1.000 0.197 0.421 0.261 0.160 11 Fuhwa 0.659 0.738 0.591 1.107 0.425 0.682 12 Jihsun 0.477 1.000 0.466 0.659 0.000 0.659 13 Chian Development 0.640 0.644 0.475 0.769 0.126 0.642 14 Waterland 1.000 1.000 0.319 0.499 0.000 0.499
Mean 0.736 0.531 0.352 0.618 0.137 0.480 Standard Deviation 0.218 0.313 0.197 0.341 0.164 0.251 Notes: The order (No.) of the FHCs is coded by total assets.