Variable definitions

At the beginning of establishing and expanding securities firms, capital must be an important factor of the foundation of the company. Capital’s importance to financial institutions is mentioned in many articles. For example, Berger and Mester (1997) wrote that a bank’s insolvency risk depends on its financial capital available to absorb portfolio losses as well as on the portfolio risks themselves. In addition, Fukuyama and Webber (1999), Zang et al. (2006), Fang and Hu (2009) and Hu and Fang (2010) also acclaimed the role of capital.

However, capital will have different values because of the difference of time of investment.

Therefore, adoption of capital as an input may have a harmful effect on the research. Hence, we refer to Zang et al. (2006) and adopt stakeholder equity to be one of the inputs.

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Prior researches often used salaries expense to measure the efficiency of managing a securities firm. However, there are two reasons that we don’t choose salaries expense as our input. First, we think salaries expense is just one of the items included in the operation fee of a company. Secondly, there is a research limitation because the item of salaries expense is seldom exposed on the financial statement of securities firms. Therefore, we follow the article of Drake and Hall (2003) and Hu and Fang (2010) and used operational expense as one of our inputs to measure efficiency. In addition, we refer to Fukuyama et al. (1999) and Wang et al.

(2003) and include labor employment as one of the inputs. At last, we follow Fang and Hu (2009) and adopt total fixed assets as another input variable.

The following items are the inputs we choose:

(1) stakeholder equity (x1) (2) operation expense (x2) (3) labor employment (x3) (4) total fixed assets (x4)

Lots of companies use financial indicators, such as return on assets (ROA) and return on equity (ROE) to evaluate their financial performance; however, these performance relies on efficiency and productivity improvements and price variations (Fried et al. 2008, p.11).

According to Development Report of China’s Securities Industry (2012) published by China Financial & Economic Publishing House, brokerage revenue, underwriting revenue and financial consultant fee are the main sources of revenues of securities firms. Goldberg et al.

(1991) estimated the economies of scale and scope in defining the input-output variables, and used brokerage revenue, underwriting and capital positioning operations revenue and account supervision revenue as outputs. Zhang et al. (2006) used five outputs, namely, commission revenue, trade gains resulting from market creation, investment banking revenue, revenue from asset management, and total revenue. Besides, for the reference of Wang et al. (1998)

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and Wang et al. (2003), the output in this research includes brokerage revenue and underwriting revenue. Therefore, the third output is proprietary trading revenue which is profit/loss from selling securities.

All variables in the research will be summed up to be an aggregate output. Because all the variables are nominal, we use the GDP deflator approach to deal with the effect of price change. All nominal variables in this study have been transformed into real variables through GDP deflators by using 2006 as the base year.

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Table 4 Definition of input and output variables

Definition Units Description

Input

“operational expenses” in balance sheet, which is caused by selling and producing commodity labor

employment

Number of people number of employees in the “yearly finance report”

total fixed assets NTD (in thousands) in 2006

“proprietary trading revenue” in income statement

Note: To deal with the effect of price change on nominal variables, we use the GDP deflator approach. All the nominal variables in this research are transformed into real variables through GDP deflators by using 2006 as the base year.

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Environmental variables are a set of dynamic named values that can affect the way running processes will behave on a computer and they cannot be influenced and controlled in the short run while they change in the long run and further impact the efficiency values.

According to Mitton (2002), better stock price performance is associated with firms that had indicators of higher disclosure quality. Therefore, we include the type of trading as an environmental variable because listed firms needs to provide their financial report while unlisted firms need not. Based on the differences of property, it’s necessary to examine whether different types of trading will have an impact on the efficiencies of securities firms.

In 1999, American pass a law called Financial Service Modernization Act of 1999. The law allows financial holding companies to do cross-industry business which means these companies can initiate different business such as banking, securities, insurance, etc. The law not only presents a significant transformation in the type of operation of financial industry in American but also stirs the world trend of consolidation of financial business. In Taiwan, there are many financial organizations who are small-sized and with high level of bad debts.

According to the book of Ansoff (1965), it pointed out that business integration can lower the costs and increase the benefits. Therefore, we are interested in whether a securities firm is under a financial holding company can have a different efficiency score in using various resources. Therefore, we include the dummy variable of being under financial holding company or not as an environmental variable.

In recent years, Tecles and Tabak (2010) thinks that when there is a higher level of capitalization, there is a higher risk that a company will face which prompts that managers advance supervision on the management of the company and further have higher efficiency.

Hence, the research adopts the variable of risk-based capital which shows the level of capitalization as one of the environmental variables.

Ritter (1991) finds that the age of a company’s establishment has a negative impact on the value of the company. Therefore, we want to know the influences of the age of a company

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toward the efficiency of usage of individual inputs and incorporate the age of establishment of the company as an environmental variable. As of the financial crisis explosion on 2008, we set a dummy variable according to year. The years after 2008 are set to be one, and the years before 2008 are set to be zero. Therefore, we can see whether the financial crisis has an influence on the efficiency of inputs.

Table 5

Variable Definition

Type of trading The type of trading is classified into listed firms (TSE and OTC) and unlisted firms.

Financial Holding A dummy variable which describes whether a securities firm is under a financial holding company.

Risk-based

Capital Represent a company’s preference for risks.

Age The year that a company establishes.

Year A dummy variable which describes the year before or after financial crisis which is set to be year 2008.