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董監事質押與銀行信用風險及績效之關係-以本土上市櫃商業銀行為例

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(1)國立高雄大學經濟管理研究所 碩士論文. The Relationship among the Collateralized Shares, Credit Risk Management and Performance in the Taiwan Banking Industry 董監事質押與銀行信用風險及績效之關係-以本土上 市櫃商業銀行為例. 研究生:謝明選 撰 指導教授:陳怡凱 博士、高蘭芬 博士. 中華民國九十七年七月. i.

(2) 致謝詞. 從大學到研究所的時光都在這裡度過,如今我也要離開這裡步向人生旅程的 下個階段。從當初的懵懂無知到現在,有許多的師長和同學看著我成長,我心中 的感觸和感激不是在這裡可以解釋清楚。我最要感激的是我的母親許舜驊女士, 在這段時間中,我們經過了家中最痛苦和無奈的時刻,但我們都走過來了,母親 也一直是促我成長的動力。其次,我的指導老師陳怡凱先生。我想在老師的眼中, 我一直是心思複雜又固執己見的問題學生,但無論事後是接受或否,老師總是願 意讓我把我的想法說完,在研究所的專業領域中,能夠接受學生在專家面前大放 厥詞的老師並不多,我很幸運的遇到這一類型的老師,而每次 meeting 前,我也 總想著今天要怎麼說服老師,老師也一直是促我成長的動力之ㄧ。我的指導老師 高蘭芬女士提供我兼職的機會,我雖然沒有做過正職的工作,但兼職我已經做好 幾年了,我很清楚在外面這些錢是沒這麼好賺的,而老師在我論文修改期間也提 供了寶貴的建議和想法,對此我一直心存感激。也許我將來並不從事學術研究, 但我期許自己在其他領域發展時,也能達到如老師一般的專業水準。. 謝謝各位陪伴我成長的同學和師長,一語帶過並不代表是客套話,在這個地 方,值得我感激的人太多,你們陪我走過孤獨和痛苦的時刻。現在,我終於要離 開了,我也期許自己將來有能力承受更多的壓力和責任,不辜負你們對我的期望。. 謝明選 謹誌於 高雄大學經濟管理研究所 中華民國九十七年七月. ii.

(3) 董監事質押與銀行信用風險及績效之關係-以本土上 市櫃商業銀行為例 指導教授:陳怡凱 博士 國立高雄大學金融管理學系 指導教授:高蘭芬 博士 國立高雄大學金融管理學系 學生:謝明選 國立高雄大學經濟管理研究所 摘要 公司治理和銀行內部控管的關係已成為近年來重要的議題,而在中信金和中 華銀的事件過後,董監事質押的因素已為金管會所重視並對銀行內部董監事比例 加以規範,然而,目前在學術界中卻甚少有人針對此因素加以研究。董監事質押 是否為銀行董監事濫用職權的誘因之ㄧ?當這些握有管理權的董監事將質押當 作個人融資的方法時,會不會影響董監事對於銀行內部信用風險控管的態度?此 為本研究之主要議題。 本研究之實證資料來源自 TEJ(the Taiwan Economic Journal)資料庫,研究母 體為台灣本土上市櫃商業銀行,期間自 1999 年第四季至 2007 年第四季,共選取 27 家目前和曾經上市櫃之台灣本土銀商業行為樣本。研究方法使用敘述統計和 VIF(Variance Inflation Factor)陳述資料的特性,並以 penal data regression 做為主 要模型以期去除選取樣本間異質性的問題。 本研究為一篇實證性質的文章,主要目的在於對董監事質押和銀行內部風險 控管和獲利能力彼此之相關性有更深一層的了解。除了提供一個實證基礎,讓政 府部門瞭解董監事質押是否是一個值得去監控的因素外,也能提供政府部門作為 未來在政策制定方面之參考。 關鍵字(詞):董監事質押、商業銀行、信用風險. iii.

(4) Abstract. In recent years, considerable concerns have arisen over the issue of corporate governance in banks’ supervision. One of the major issues has been investigated whether the sound mechanism of corporate governance benefits bank risk management and performance. The collateralized shares, serving stocks as collaterals, are one of financial leverage approaches and it is likely to be an incentive for block shareholders to misapply assets due to the deviation between the controlship and the ownership. The objective of this study is to examine whether the attitude of the board of directors toward risk will affect the bank risk and performance. The samples and examination periods are the quarterly data of 27 listed Commercial Banks on the Taiwan Stock Exchange and OTC market from 1999 to 2007. Empirical results support the claim that the collateralized shares may have contributed to a lower return due to a higher risk and they are in line with previous studies (Chiou et al., 2002; Kao and Chiou, 2002). In conclusion, the monitoring mechanism should enforce relatively regulations more strictly to avoid the agency problems. Especially to the insiders of influence such as board of directors or block shareholders, more strictly regulations and the disclosure of relatively information should be necessary. The result will be expected to lead to better understanding of the nature of the collateralized shares and laying the groundwork for realizing that is the collateralized shares worth monitoring. It may provide policy implication for the regulators in the later monitoring requirement.. Key words: The collateralized shares, Commercial bank, Credit risk. iv.

(5) Contents. Chapter 1 Introduction..……………………………………………………………..1 1.1 Research Background………………………………………………………...1 1.2 The Objectives, Incentives and Major Findings……………………………...3 1.3 Research Framework…………………………………………………………4 Chapter 2 Literature Review………………………………………………………...5 2.1 Corporate Governance and the Collateralized Shares………………………..5 2.2 How to Estimate the Risk on Banks’ Loan and Performance? ........................7 2.3 Other Related Issues in the Banking Industry ……………………………….9 2.4 The Expectations of the Study……………………………………………..10 2.5 The Contribution of the Study……………………………………………..11 Chapter 3 Methodologies………………………………………………………….13 3.1 Dataset……………………………………………………………………..13 3.2 Panel Data Model…………………………………………………………..14 Chapter 4 Empirical Results……………………………………………………….17 4.1 Variables and Descriptive Statistics…………………………………………17 4.2 Empirical Results…………………………………………………………...19 4.3 Robustness of Performance and Risk Results - Seasonal Effect ……..…22 4.4 Discussions...………………………………………………………………..22 Chapter 5 Conclusions...….……………………………………………………. 24 Reference……………………………………………………………………………25 Appendix A: Bank Translated Name………………………………………………43 Appendix B: Variable Descriptive Statistic by Quarter…………………………..44 Appendix C: Variable Descriptive Statistic during Examination Periods………53. v.

(6) List of Tables. Table 1: List of financial institutions (end of September 2007)……………………...29 Table 2: Samples and observations…………………………………………………..30 Table 3: Variable definitions...………………………………………………………..31 Table 4: Variance inflation factor…………………………………………………….32 Table 5: Pearson correlation………………………………………………………….33 Table 6: Descriptive statistics………………………………………………………...34 Table 7: The relationship between holding, the proxy of return and risk…………….35 Table 8: The relationship between the collateralized shares, the proxy of return and risk…………………………………………………………………………..36 Table 9: The variation in the relationship between the collateralized shares, the proxy of return and risk……………………………………………………………38 Table10: Robustness of performance and risk results - seasonal effect (separate samples).........……………………………………………………………..39 Table 11: Robustness of performance and risk results - seasonal effect (setting dummy variables)……………………………………………………………………40. vi.

(7) List of Figures. Figure1: Performance trend (ROA, ROE)……..…………………………………… 41 Figure2: Performance trend (RARROA, RARROE)……………………………….. 41 Figure3: Bank asset comparison……………………………………………………. 42. vii.

(8) Chapter 1 Introduction. 1.1 Research Background. After several disclosures of serious financial crises in the 1990s, establishing a strong monitoring mechanism is one of the priorities of the government and investors. The Financial Supervisory Commission (FSC), founded in July 2004, is one of the main authorities of all financial institutions. The objectives of the FSC are not only to consolidate the supervision but also institute a regulator of the banking industry. Nevertheless, after several cases of failure banks such as the financial distress of the Chinese Bank and the disclosure of the scandal in the Chinatrust Bank Holding Company, FSC was asked to enforce banks’ supervision. The bank industry is a “concessionary” in opposition to other enterprises that operate with lower equity capital. Corresponsively, banks are going to failed easily then other enterprises if they suffer financial crises. In the other hand, the government, corporations, shareholders and taxpayers would suffer a huge loss if banks go bankrupt. For those reasons, monitoring mechanism must ensure that banks can operate in safety, reliability and stability. Particularly to the commercial bank, the financial monitoring mechanism must ensure that the family block shareholder utilize bank’s assets well when their objectives are not only to facilitate the circulation of money but earn profit. In recent years considerable concern has arisen over corporate governance issues in corporates’ supervision since Jensen and Meckling (1976) introduced the agency theory. One of the major preoccupations of this issue has been investigating if corporate governance were benefit to performance and risk. The last decade we have seen mounting evidence of well corporate governance mechanism is contributive to performance and risk-decreasing (La Porta et al., 1999; Claessens et al., 1999). However, this viewpoint has not been sufficiently supported by direct evident to prove that this causal relationship is identical in the banking industry. While no one denies the plausibility of this hypothesis, little empirical evidence has been gathered to support it. The agency problem is often associated with self-interest behaviors such as inside trading, cross-shareholding or overinvestment. One of the more intriguing 1.

(9) issues prevailing throughout the last few decades of empirical researches is the question of why banks’ owners/block shareholders misapply assets outrageously. To this question, the deviation between the controlship and the ownership is applicable to elaborate it. Viewing those questionable Taiwanese banks, it should be noted a phenomenon that banks’ owners/block shareholders use little money to own shares with controlship of the bank. Financial institution assets come from depositor and policyholder mainly. However, block shareholders can make use of assets totally even if they own little proportion of the total assets. In other words, they’re not responsible for all debts if the corporate suffer financial crises. Such a curious situation that the deviation between the controlship and the ownership would be dangerous because it could give block shareholders an incentive to misapply assets due to the self-interest mindset and arising other financial distress. The shares collateralized, served owing share as collateral for the loan, is also a financial leverage approach but could be an incentive for block shareholders to misapply assets due to the deviation between the controlship and the ownership. Chiou et al. (2002) provide a feasible definition to the collateralized shares and point out that the term “collateralized shares” referred to shareholders’ personal behavior and it is irrelevant to the corporation. However, it could be a factor for block shareholders to abuse assets due to self-interest motive. The share collateralized is also an important issue to the banking industry in recent years due to the cases such as the Chinese Bank and the Chinatrust Bank Holding Company. In fact, FSC was concerned with this issue and constituted related regulations 1and it shows that FSC believe a relationship between collateralized shares and the credit risk on banks’ loan. Since the family block shareholder use little money to own shares with management controlship, whether the financial leverage approach affect the attitude toward credit risk of the management would be important. However, The Securities and Futures Bureau (SFB) had already asked all banks to do that before FSC. It is thus clear that monitoring mechanisms are not in agreement on the shares collateralized. After all, the cases of the Chinese Bank and the Chinatrust Bank Holding Company are just particular cases or the share collateralized is an incentive for block shareholders to 1. On November 2006, FSC announced that the board of directors and block shareholders of all banks need to show up the information that how many stocks they collateralize if the proportion of collateralized shares is as half as their own stocks. 2.

(10) misapply assets. It is a serious problem for monitoring mechanisms.. 1.2 The Objectives, Incentives and Major Findings Although FSC was concerned about the problems of collateralized shares in recent years, there are only few literatures discussed in this issue in the academia (Chiou et al., 2002; Kao and Chiou, 2002; Hsiung, 2000) and those researches, developed in terms of listed company samples, can’t apply to our study totally. In fact, the relationship of collateralized shares and bank risk has not been examined before. The banking industry is a special case in opposition to other enterprises due to the lower equity capital compared to corporations. Banks will go bankruptcy easily then other enterprises if they suffer financial crises. Under the situation that the deviation between the controlship and the ownership, could the collateralized shares be a factor for the board of directors and block shareholders to misapply bank’s assets? When the block shareholders own the controlship of the bank and employ collateralized shares as their leverage approach, will their personal leverage behavior affect bank credit risk? It is a critical problem for the monitoring mechanism and it intrigues us to put emphasis on this issue. In light of these concerns, the objective of this study is to examine whether the attitude of the board of directors toward risk will affect the bank risk and performance. Return on Assets (ROA) and Return on Equity (ROE) are generally used to evaluate performance. Barber and Lyon (1996) and Core et al. (2006) argued that ROA is a preferred measure of operating performance because it is not affected by leverage, extraordinary items and other discretionary items. However, in this study we followed two ratios created based on the Market-Derived Shape Ratio to evaluate the Risk-adjusted performance: Risk-Adjusted Return on Equity (RARROE) and Risk-Adjusted Return on Asset (RARROA) (Stiroh, 2004). To compare with difference between ratios adjusted in terms of the risk before and after and make a comprehensive result, we adopt both measures in our study.. Furthermore, Rose. (2002) argued that credit risk plays the major role of all kind of risk because the largest asset item in the banking industry is loans. Gompers et al. (2003) also noted that weak governance might encourage managers to behave in a less risk-averse manner. For bank managers, what criteria and volume about a loan reveal managers’ 3.

(11) attitude. Therefore, in our study we also examine the relationship between the shares collateralized and credit risk. Empirical results in this study are in line with previous researches (Chiou et al., 2002; Kao and Chiou, 2002) that the financial leverage approaches such as collateralized shares affect the attitude toward credit risk of the management and performance, higher proportion of shares collateralized is significant positively related to credit risk and negatively related to risk-adjusted return. Since the objectives of the monitoring mechanism are to consolidate the supervision and ensure the safety of the banking industry, the findings in our study may disclose some information of bank risk and performance. Overall, the focus of analyses presented in this paper is to provide empirical evidences related to our main issue and attempt to address this issue of concern by shedding light on the nature of the problems.. 1.3 Research Framework To achieve these objectives, this study is structured as follows. The first section deals with the research background, objectives and incentives in this study. Literature review offers theoretical foundations for the development of the research and our expectations will be shown in the second section. After which research methodology is presented with full details of procedures for the collation of data, results are then presented with a thorough description of the relationship among the collateralized shares, credit risk management and performance in the domestic banking industry. Finally, results are discussed and conclusions are drawn.. 4.

(12) Chapter 2 Literature Review. As we discussed above, a fairly large body of literature exists on corporate governance. However, within that literature, there is a surprising lack of information on the relationship between corporate governance and banks’ performance. Furthermore, the research is still at an early stage in evaluating collateralized shares, not to mention a paucity of literature on this subject. In this chapter, we initially attempt to converge and review the finding of these earlier studies. After that, we make up the literature on how to estimate credit risk and performance. At last, the contribution of this paper is presented.. 2.1 Corporate Governance and the Collateralized Shares The relevant issue of corporate governance has been wildly discussed since Jensen and Meckling (1976) introduced the agency theory and investigated the nature of the agency costs generated by the debt and equity. Over the past few decades of research on agency problem remain controversial on one question that if more delegation to agent (manager) were benefit to shareholder. Kangis and Kareklis (2001) took public and private banks for example and argued that managers in private banks showed greater interests and more mobile in their jobs because of more compensation. It seems to imply that a strong linkage between manager and corporate is necessary. However, more existed literature supported the argument that more delegation to manger will deepen agency problem. La Porta et al. (1999) and Claessens et al. (1999, 2000) suggested that block shareholders cause equity agency problem due to the deviation between the controlship and the ownership, especially to family-control firms. Although more free cash flows for block shareholders with controlship is significant positively related to performance and this finding is consistent with Jensen and Meckling (1976), ownership concentration will reduce corporate value. However, either block shareholders’ holding is good to the corporate or not, previous literature implied that it should be an influential factor to monitor. Several studies have supported the viewpoint that a high performing corporate is characterized by good governance system and the findings reported in the literature can be classified into following dimension: inside control efficiency, inside financial control efficiency and 5.

(13) outside control efficiency (Klapper & Love, 2003; Gompers et al., 2003; Khiari et al., 2007). This viewpoint, however, should be similar to the banking industry theoretically. Unfortunately, there has thus far been relatively little research into this area. Frolov (2007) reviewed the theoretical and empirical research on disclosure and explores the problem of public disclosure in banking and noted that mandated disclosure rules for banks to be a consequence of the government policy of financial safety net. Similar conclusion could be found on other studies (Singh, 2006; Hacimahmutoglu, 2007), but their viewpoint has not been sufficiently supported by direct evident to prove that it is helpful for banks to get the batter performance. Furthermore, although the collateralized shares give rise to wild discuss in recent years, the relationship of collateralized shares and bank risk has not been examined. However, there are few researches to explore collateralized shares in corporate finance. Since banks are regarded as corporate with enforced regulations, the relationship between collateralized shares and corporate is examined. Seminal work on defining the collateralized shares was carried out by Chiou et al. (2002). They point out that the term “collateralized shares” referred to shareholders’ personal behavior because the separation of control right and ownership made collateralized shares seem irrelevant to the corporation, but the corporation value could be reduced and other shareholders’ right would be deprived if directors and supervisors collateralized their shares, especially during the period of recession, they could invest in riskier investment or resort to illegal conduct due to the pressure for stock disposals rather than invest in efficient investments. In the other hand, Hsiung (2000) and Chiou et al. (2002) separate their samples into failed and non-failed corporations and investigate the relationship of collateralized shares to the financial distress in Taiwan during the Asian Financial Crisis. They found that the higher the proportion of collateralized shares, the poorer the operating performance and thus the higher the possibility of financial crises. It shows that the directors and supervisors could exercise their power to invest in riskier investment or resort to illegal conduct during the period of recession. Kao and Chiou (2002) attempted to explain how directors and supervisors do to achieve their self-interest goal when they collateralize their shares subsequently. They suggest that directors and supervisor would announce unrealistic message to outside shareholders in order to dressing self-interest motive up through. 6.

(14) accounting earning management.. 2. Moreover, the higher the proportion of. collateralized shares, the lower the prediction power of current earnings on future earnings. In the end, earning management would diminish the credibility of accounting numbers and thus mitigate the relation between accounting earnings and stock returns. Those literatures support the argument that collateralized shares is an incentive for directors and supervisors to abuse assets and affect the attitude toward credit risk of the management because they could be invest in riskier investment. Therefore, in the monitoring mechanism’s place, we need to realize how to estimate the risk on banks’ loan next after catching on the concept of the collateralized shares.. 2.2 How to Estimate the Risk on Banks’ Loan and Performance? There are comprehensive exist literature which discussed how to estimate the risk on banks’ loan, namely, credit risk. Rose (2002) give bank credit risk a clear concept, they point out that credit risk plays the major role of all kind of risk 3 because the largest asset item in the banking industry is loan, which generally account for half to almost three-quarters of the total values of bank assets. The probability that some of bank’s assets, especially to its loans, will decline in value and perhaps become worthless is known as credit risk. Furthermore, Gompers et al. (2003) also noted that weak governance might encourage managers to behave in a less risk-averse manner. For bank managers, what criteria and volume about a loan reveals managers’ attitude. Therefore, in our study we examine the relationship between credit risk and the collateralized shares. Our purpose is to realize if personal leverage behavior affects bank credit risk when the block shareholders own and the controlship of the bank and employ collateralized shares as their leverage approach. Reviewing the theoretical and empirical research on the variables used to evaluate the credit risk, the ratio of nonperforming loans to total loans is generally used to evaluate credit risk (Bratanovic and Greuning, 2000; Rose, 2002). 4 We adopt this ratio because bankers’ 2 3. 4. Schipper (1989) suggested that the earning management is a self-interest behavior, the directors and supervisors reach their goal on the strength of influencing the financial statements. Rose (2002) suggested that bankers are concerned about six types of risk. These are credit risk, liquidity risk, market risk, interest rate risk, earnings risk and solvency risk and can be grouped as credit risk, market risk and operational risk. Actually, the ratio of loan loss provision to total loans is other ratio to evaluate credit risk generally. The reason we refuse this ratio is that loan loss provision is an item banks set up by themselves and related to subjective judgment of credit risk. For this reason, we adopt the ratio of nonperforming loans to total loans to evaluate credit risk. 7.

(15) attitude toward credit risk of the management is related to the problem that whether the inner censorship on nonperforming loans is strict or not. Furthermore, nonperforming loans is an item which was happened and the monitoring mechanism can realize if banks operation is well-regulated or not in accordance with this item. On the other hand, the main objective of bankers is to maximize a bank’s risk-adjust rate of return. To realize if banks were profitable and stability, in our study we serve risk-adjust rate of return as the measure of performance. We introduce some familiar measures of bank performance that give thought to risk. Two measures are risk-adjusted rates of return which are defined as a bank’s average performance (measured as the mean) divided by the volatility of performance (measured as the standard deviation) This method was introduced by William F. Sharpe in 1966 and so-called the “Sharpe Ratio”, and then Stiroh (2004) developed another Sharpe Ratio in terms of originally ideas. 5 Stiroh (2004) defined risk-adjusted return on equity, RARROE, and on assets, RARROA, as:. RARROE = RARROA =. ROE. (1). σ ROE ROA. (2). σ ROA. where ROE is the mean return on equity (net income divided by equity), σ ROE is its standard deviation, ROA is the mean return on assets (net income divided by assets), and σ ROA is its standard deviation. Those ratios can be viewed as profits per unit of risk and a higher ratio indicates batter Risk – adjusted profits. However, prior studies implied that ROA is a batter measure of performance than ROE. Barber and Lyon (1996) and Core et al. (2006) argued that ROA is a preferred measure of operating performance because it is not affected by leverage, extraordinary items and other discretionary items. However, in this study we followed two ratios created based. 5. The original Sharpe Ratio is a market-derived ratio, which defines risk-adjusted returns as market returns divided by the standard deviation of returns and needs to take account of the risk-free rate of return. But we can’ t get market returns because of market data are not available for all banks, so we adopt the Sharpe Ratio developed by Stiroh (2004). By the way, the risk-free rate of return would not affect the results if it is constant across all banks. 8.

(16) on the Market-Derived Shape Ratio to evaluate the Risk-adjusted performance: Risk-Adjusted Return on Equity (RARROE) and Risk-Adjusted Return on Asset (RARROA) (Stiroh, 2004). To estimate a comprehensive result, we adopt both measures in our study. Furthermore, we following Barber and Lyon (1996) advocated operating income before depreciation because this measure is not affected by managerial discretion in depreciation policy. Therefore, we prefer operating income before depreciation as a measure of performance in our study.. 2.3 Other Related Issues in the Banking Industry In the banking industry, the capital adequacy ratio, the percentage of a bank's capital to its risk-weighted assets, has seen increased attention in recent years. There are several researches to explore the concept of capital adequacy. Sharpe (1978) defines the capital as the difference between assets and deposits, the deposits will be safe when the ratio of capital to assets is large enough, and it means that capital would be "adequate". Lackman (1986) employ three different capital adequacy constraints to examine the relationship between capital adequacy and bank portfolio and find that the higher capital adequacy ratio will always reduce the variance of return on equity and causes a shift of bank portfolios towards less risky assets, but to varying degrees among different banks and will increase the probability of losses. Karels et al. (1989) examine the relationship between bank capital adequacy and market measures of risk and find that higher levels of capital adequacy correspond with lower risk measures. Although there are some literatures which provide evidence to show the relationship between capital adequacy and risk, Daesik and Anthony (1988) challenge the effectiveness of the traditional capital ratio regulation. They suggest that it ignores the individual banks' different preference structures and allows "risky" banks to circumvent the restrictions. However, up to now, the capital adequacy ratio is still a convictive criterion to evaluate whether banks operate safety. According to Basel II, there is a new and significantly accurate framework to calculate this ratio. Bank size is another factor which is essential to performance. The relevant research on bank size and performance includes cost and revenue performance, as well as the abilities of banks of different sizes to provide retail services in which both large and small banks compete. Early research on bank cost scale economies generally 9.

(17) finds very little scale economies at very small sizes, typically well under $1 billion in assets (Berger et al., 1987). Later research suggests that there may be more extensive cost scale economies in the 1990s, with average costs declining up to asset sizes of $25 billion or more (Berger and Mester, 1997). Furthermore, other research suggests that large banks may have also gained relative to small banks in terms of revenues. Profit efficiency studies and other studies including revenues find that M&As increased profits and revenues through improved risk-expected return frontiers (e.g., Akhavein et al., 1997; Hughes et al., 1999). Some evidence also suggests that U.S. banks involved in M&As improved the quality of their outputs in the 1990s in ways that increased costs, but still improved profit productivity by increasing revenues more than costs (Berger and Mester 2003). However, some evidence also suggests that large banks may not be equivalent to batter performance. Hubris hypothesis, introduced by Roll (1986), suggested that mangers might overestimate M&As synergy and recognize higher goodwill in the financial statement in order to take first-moving advantage, then result in huge lost and bankruptcy. Summarizing these arguments, there is obviously no single solution to the problem that how large a bank is suitable. In our research, we served the capital adequacy ratio and bank size as control variables. Theoretically, the capital adequacy ratio is negatively related to risk. Furthermore, because research on the relationship between performance, size and the capital adequacy ratio remain controversial, we attempt to detect their patent and provide explanation but not to anticipate single in our study.. 2.4 The Expectations of the Study As noted by Jensen and Meckling (1976), the nature of the agency costs can be generated by the debt and equity. Observably, the equity problem fits in with our case. Jensen and Meckling (1976) argued that the agency problem would be diminished by higher proportion of director shareholders’ holding. Kangis and Kareklis (2001) argued that managers in private banks showed greater interests and more mobile in their jobs because of more compensation. However, more existed literature supported the argument that more delegation to manger will deepen agency problem. Shleifer and Vishny (1989) advanced the entrench effect and argued that managers would entrench themselves by making manager-specific investments that make it costly for shareholders to replace them. For this reason, managers can reduce the probability of 10.

(18) being replaced extract higher wages and larger perquisites from shareholders, and obtain more latitude in determining corporate strategy. La Porta et al. (1999) and Claessens et al. (1999, 2000) suggested that block shareholders cause equity agency problem and ownership concentration will reduce corporate value. We expect La Porta et al. (1999) and Claessens et al. (1999, 2000) investigated the East Asia may more identical to our case but look over the change on block shareholders’ holding. We state it in null from as follows: H1a: Director shareholders’ holding is positively associated with risk H1b: Director shareholders’ holding is negatively associated with performance As discussed above, such as Chinatrust Bank Holding Company’s case, the family block shareholder could use little money to own shares with management controlship through personal leverage approach such as the share collateralized. It causes equity agency problem because of the deviation between the controlship and the ownership. Hsiung (2000) and Chiou et al. (2002) found that the higher the proportion of collateralized shares, the poorer the operating performance and thus the higher the possibility of financial crises. Kao and Chiou (2002) also suggested that the higher the proportion of collateralized shares, the lower the prediction power of current earnings on future earnings because managers would mitigate the relation between accounting earnings and stock returns through earning management. However, there are still few researches to explore collateralized shares in corporate finance. Since banks are regarded as corporate with enforced regulations, the relationship between collateralized shares and corporate is examined in our study. We state it in null from as follows: H2a: Collateralized shares are positively associated with credit risk H2b: Collateralized shares are negatively associated with performance. 2.5 The Contribution of the Study As we described earlier, although collateralized shares give rise to discuss in recent years, it is rare to explore the relationship between collateralized shares, credit risk and performance. Hence, the purpose of this paper is to examine this relationship 11.

(19) and give it a feasible explanation. Under the hypothesis of the higher the risk, the higher the return, it shows that collateralized shares influence bankers’ intention to credit risk management if there were significantly relationship between them. We also detect the relationship between collateralized shares and risk-adjusted rates of return, if there were no significantly relationship among them when banks are profitable, it shows that those banks “Take risk too much.” Overall, this study will be expected to lead to better understanding of the relationship between the collateralized shares, credit risk management and performance in the banking industry. It might be critically important in laying the groundwork for realizing is the collateralized shares worth monitoring. The results may provide policy implications for the regulators in the later monitoring requirement.. 12.

(20) Chapter 3 Methodologies. 3.1 Dataset The population of our research is domestic commercial banks. The examination periods are from 4th quarter 1999 to 4th quarter 2007. Since some banks were taken over by FSC, we got an unbalanced panel data in our study. At the end of September 2007, there are 40 domestic banks. However, there are only 26 banks listed in the Taiwan Stock Exchange or the OTC market during our examination periods. Furthermore, the criteria of the sampling we adopt are (a) whether equity is negative and (b) whether the bank is taken over by FSC. The samples are eliminated if they fit the conditions of (a) and (b). Since the population of this study is the domestic commercial banks, investment banks are also eliminated. 6. The Taidungbank (code:. 2811) and Chunghsingbank (code: 2846) are included in the sample because they are ever listed in the Taiwan Stock Exchange. 7 Finally, we adopt at most 27 samples and 840 observations in our study. Table 1 indicated the list of financial institutions and which is listed in the Taiwan Stock Exchange or the OTC market during our examination periods. Table 2 indicated that samples and observations in our study. Samples were collected primarily by means of the panel quarterly data of commercial banks listed in the Taiwan Stock Exchange and the GreTai Securities (OTC) Market. The information on collateralized shares and relevant financial data are collected from the Taiwan Economic Journal (TEJ) database. The effect of mergers and acquisitions affects observations rather than samples actually. In our study, four banks (Cathay United Bank, Standard Chartered Bank, Taipei Fubon Commercial Bank and Shin Kong Commercial Bank) are in accordance with this issue. However, none of those banks are both but only one listed in the Taiwan Stock Exchange before M&A. Taking Taipei Fubon Commercial Bank for example, Before M&A, Fubon Commercial Bank was listed bank, but Taipei Commercial Bank was not. Such identical cases are Cathay United Bank and Shin 6. 7. China Development Industrial Bank Inc. is not included in the sample because their operating mode and objective are different from the commercial bank even though it is listed banks in the Taiwan Stock Exchange. The Chunghsing bank is excluded because it is taken over by FSC in 2000. 13.

(21) Kong Commercial Bank. The predecessor of Standard Chartered Bank is Hsinchu bank which was purchased by Standard Chartered Bank in 2006. However, it is viewed as a domestic bank after merger and we adopt it as our sample in our study.. 3.2 Panel Data Model Since OLS estimators could be inconsistent and meaningless if there were heterogeneity across individuals. To control for individual heterogeneity, the quantitative analysis of the panel data regression model was conducted. It consists of two models: the fixed-effects model and the random-effects model. They can take into account the heterogeneity across firms by allowing variable intercepts. The fixed-effects model is equivalent to introduce dummy variables to specify individual cross-sectional effects. If the regression model is specified as y i t = α i + β χ it + ε i t '. ~. (3). i =1,..., N, t =1,...,T.. ~. where β is constant, α i is the individual effects. The fixed-effects model allows '. ~. us to specify individual cross-sectional effects by conducting dummy variables as. y it =. N. ∑α j =1. D ij + β χ it + ε it '. i. ~. (4). i = 1,..., N , t = 1,..., T .. ~. where Dij =1 if i = j ;0 otherwise, then the fixed-effects model can sweep the individual effect α i by summarizing t periods, getting mean response over t periods and finally subtracting to each other as. ( y it − y i ) = β ( x it − x i ) + ( ε i t − ε i ) '. ~. where y i =. 1 T. T. ∑. t =1. ~. (5). ~. y it and x i = ~. 1 T. T. ∑x t =1. it ~. , then the slope estimators are BLUE (Best ∧. Linear Unbiased Estimator) when N → ∞ or T → ∞ or both. However, α i (intercept) 14.

(22) will be unbiased but consistent only when T → ∞ . As opposed to the fixed-effects model treating the effects of omitted individual-specific variables are constant over time, the random-effects model, also referred to the error component model, view them as random variables and irrelevant to the error terms and the covariance structure of. y it = α i + β χ it + ε it '. ~. ~. i = 1, ..., N , t = 1,..., T . is. ⎧ 0 ⎪ cov( yit , y js ) = ⎨ σ α2 2 ⎪ 2 ⎩σ α + σ ε. i≠ j for i = j , t ≠ s for i = j , t = s for. (6). then, the random-effects model applies the generalized least squares (GLS) method to estimate slopes and other parameters. However, contrast with the fixed-effects model, ∧. ∧. both β and α i are BLUE when N → ∞ or T → ∞ or both. ~. There are three criteria used to discriminate which model is batter. First, F test can be applied to test whether OLS or the fixed-effects model is fit. The null hypothesis, the alternative hypothesis and the test statistic is shown as H 0 : α1 = α 2 = ...... = α N = α (OLS ) H1 : Not H 0 ( Fixed ). Test. Statistic. :F =. ( SSE R − SSEU ) /( N − 1) ~ F( N −1), ( N T − N − K ) SSEU /[ N T − ( N + K )]. (7). where K is the number of explanatory variables, not including the intercept, SSER and. SSEU are error sum of square when H0 and H1 is true, respectively. It represents that individual effects do not exist when H0 is true. However, oppositely, it shows that not all intercepts are equal and individual effects exist. The second criterion is LM (Lagrange Multiplier) test; it can be applied to test 15.

(23) whether OLS or the random-effects model is fit. The null hypothesis, the alternative hypothesis and the test statistic is shown as following equation, where. ∧. ε nt. means. residuals derived by OLS method. It represents that the intercept is constant when H0 is true and individual effect exists when H1 is true. H 0 : σ α2 = 0(OLS ) H1 : σ α2 > 0( Random) 2. T est. Sta tistic. ⎡ N ⎡ T ∧ ⎤2 ⎤ ⎢ ∑ ⎢ ∑ ε nt ⎥ ⎥ NT n =1 ⎣ t =1 ⎦ 2 ⎢ − 1 ⎥ ~ χ (1) : LM = ⎥ 2 (T − 1) ⎢ N T ∧ 2 ⎢ ∑ ∑ ε nt ⎥ ⎢⎣ n = 1 t = 1 ⎥⎦. (8). In parsimony principle, we need to specify the empirical model as sample as possible. If individuals does not exist heterogeneity, we prefer to use the OLS method to estimate unknown parameters. However, the fixed-effects model and the random-effects model can estimate parameters more precisely if heterogeneity exists and theoretically F-test and LM-test will reject null hypothesis both. Therefore, we need to specify whether the fixed-effects model or the random-effects model is batter, Hausman test namely provides a criterion to specify it. It discriminates if αi and explanatory variables were uncorrelated or not by Wald test. The null hypothesis, the alternative hypothesis and the test statistic is shown as H0 : E(β0n X1nt ,..., X knt ) = α0 (Random) H1 : E(β0n X1nt ,..., X knt ) ≠ α0 (Fixed ). Test. −1. ∧ ∧ ∧ ⎡ ⎤ ∧ Statistic :W = ( β − β ) ⎢Var ( β ) − Var ( β ) ⎥ ( β − β ) ~ χ (2K ) ~ CV ~ GLS ~ CV ~ GLS ⎦ ~ CV ~ GLS ⎣ ∧. ∧. T. (9). where K in the number of explanatory variables, if αi and explanatory variables are uncorrelated and slope parameters derived by the fixed-effects method and by the random-effects method are both consistent, while the latter is more efficient. However, slope parameters derived by the fixed-effects method are still consistent but not by he random-effects method. 16.

(24) Chapter 4 Empirical Results. 4.1 Variables and Descriptive Statistics. a. Dependent variables. Return on Assets (ROA) and Return on Equity (ROE) are generally used to evaluate performance. Barber and Lyon (1996) and Core et al. (2006) argued that ROA is a preferred measure of operating performance because it is not affected by leverage, extraordinary items and other discretionary items. However, in this study we followed two ratios created based on the Market-Derived Shape Ratio to evaluate the Risk-adjusted performance: Risk-Adjusted Return on Equity (RARROE) and Risk-Adjusted Return on Asset (RARROA) (Stiroh, 2004). To compare with difference between ratios adjusted in terms of the risk before and after and make a comprehensive result, we adopt both measures in our study. Furthermore, to prevent results from disturbing by tax and interest, operating income was served as the numerator when ROA and ROE were computed in empirical research. We following Barber and Lyon (1996) advocated operating income before depreciation because this measure is not affected by managerial discretion in depreciation policy. Therefore, we prefer operating income before depreciation as a measure of performance in our study. The ratio of nonperforming loans to total loans (NPLR) was introduced to evaluate credit risk based on existed literatures (Bratanovic and Greuning, 2000; Rose, 2002). Moreover, σ ROE and σ ROA (Stiroh, 2004), served as the volatility of ROE and ROA respectively, were also adopted to evaluate risk.. b. Independent variables The ratio of shares collateralized to director shareholdings (CLR) and the ratio of director shareholdings to total shares (HDR) were conducted in empirical literature and served as the main effect in this paper. (Chiou et al., 2002; Kao and Chiou, 2002; Hsiung, 2000). We introduced the equity to total assets ratio (EA) and the total assets of the bank as control variables. The literature is full of discussions surrounding the 17.

(25) size effect. (Berger and Mester, 1997; Akhavein et al., 1997; Hughes et al. 1999) Chiou et al. (2002) and Kao and Chiou (2002) indicated that the size effect is another important factor to affect the performances. Furthermore, as we described earlier, the capital adequacy ratio is a convictive criterion to evaluate whether banks operate safety and there are several researches to explore the concept and importance of capital adequacy (Sharpe, 1978; Lackman, 1986; Daesik and Anthony, 1988; Karels. et al., 1989). 8 However, those variables, while important, there is considerable disagreement among researchers about the directions and we do not anticipate them either positively or negatively related to dependent variables. Table 3 listed variable definition in detail.. c. Correlations and descriptive statistics To indicate the direction and relationship between variables, descriptive statistics and Variance Inflation Factor (VIF) as a measure of collinearity were computed. The result of the VIF in Table 4, it revealed that independent variables are chiefly showed not to be significantly related (VIF< 10) except for variable HDR. However, this relationship, while significant, is moderate in strength. We also provided the Pearson correlation matrix in Table 5, the result were shown not to be significant related between independent variables. The results of descriptive statistics were shown in Table 6. The results of measures on performance suggested that ROA on the average (M = .0024, SD = .0057) is higher and more stable than those for ROE (M = .0007, SD = .1742). The patterns of risk-adjusted measures on performance, RARROA (M =1.0225, SD= 1.0198) and RARROE (M = .9214, SD = 1.0577), are similar to previous ones. The performance trend was also presented graphically in Figure 1 and Figure 2. In general, as observed in Figure 1 and Figure 2, ROA is more stable than ROE. 9 Figure 3 highlights differences between bank sizes, the distribution reflected in Figure 3 indicate that bank size is around 10 to 100 billions. The result of HDR indicated that approximately 45% of the stocks were held by Board of Directors, it shows that the extent of ownership concentration is significant 8 9. Because of the lack of observations on capital adequacy ratio in this study, we follow Stiroh (2004) that adopted equity to total assets ratio to evaluate the capital adequacy. In Figure 1 and Figure 2, we compute values and then sort the raw data by quarter, those two figure suggested the cumulative trend on performance. 18.

(26) greatly resembled previous researches (La Porta et al., 1999; Claessens et al., 1999, 2000). It may reinforce the agency problem due to the deviation between the controlship and the ownership, block shareholders can make use of assets totally even if they own little proportion of the total assets. Assuming HDR to be the cardinal variable to dependent variables, CLR is a critical factor if it were the factor for block shareholders to abuse assets due to self-interest motive. In our study, we show relationships between variables by two stages and empirical results are following presented. 4.2 Models and Empirical Results Several theoretical positions have been shown in previous chapters. However, the more important issue in our study is the question of is holding a consequential factor in banking industry. To distinguish it, the relationship between holding and dependent variables has been examined at the first stage. The model we use for the test is:. Yit = αi + β1HDRit + β2HDR2it + β3EAit + β4SIZEit+ εit. i=1…N, t=1…T , (10). where HDR represents the ratio of director shareholdings to total shares, EA represents the equity to total assets ratio, SIEZ represents the total assets of the bank. The empirical results reflected in Table 7 indicate that variable HDR is the prime cause of performance and risk in banking industry. All independent variables are related to HDR at .01 significant level regardless of variable ROESTV. More holding will increase performance and reduce risk. However, the result of HDR2 suggests that the optimum exists. Those results are in line with previous researches (Jensen and Meckling, 1976; La Porta et al., 1999; Claessens et al., 1999, 2000) that ownership concentration will reduce corporate value. Although the coefficient of HDR, which is statistically significant at .01, is positively related to all performance measures, the coefficient of HDR2 statistically significant at .01 is negatively related to all performance measures. However, the empirical result reflected that coefficients of HDR found to be statistically significant at .01 is positively related to nonperforming ratio and out of our expectation. Based on Shleifer and Vishny (1989) advanced the entrench effect, managers would entrench themselves by making manager-specific 19.

(27) investments that make it costly for shareholders to replace them. For this reason, bank manager should make more risky loans and let nonperforming ratio rise. However, the more important issue in our study is that if holding were a consequential factor in banking industry. Obviously, the empirical results support the argument that it should be. At the second stage, to discriminate the influence of the collateralized shares, variable CLR was added. The model we use for the test is:. Yit = αi + β1HDRit + β2HDR2it + β3 CLRit + β4HDRit*CLRit + β5HDR2it*CLRit + β6EAit + β7SIZEit + εit. i=1…N, t=1…T. (11). where HDR represents the ratio of director shareholdings to total shares, CLR represents The ratio of shares collateralized to director shareholdings. EA represents the equity to total assets ratio, SIEZ represents the total assets of the bank. A more detailed understanding of the relationship between the collateralized shares and dependent variables can be gained from Table 8. The results in our study support the claim that the higher the proportion of collateralized shares, the poorer the operating performance. The proportion of collateralized shares is negatively related to ROA at significant level .01 but significant positively related to ROE at significant level .01. However, the proportion of collateralized shares is negatively related to all risk-adjusted performance measures at significant level .01. We follow Stiroh (2004) that served performance volatility as performance risk. The empirical results may suggest that bank manager take highly risk (performance volatility) to make profit. Furthermore, the results indicate that the proportion of collateralized shares is significant positively related to nonperforming loans at significant level .01. When the proportion of director holding is low, the affect of collateralized shares are not very significant and consistent to performance. However, as the proportion of director holding rising, the proportion of collateralized shares is negatively related to all risk-adjusted performance measures at significant level .01. Compared to empirical results revealed in Table 7, those results are more consistent to our expectation that bank manager will misapply assets and make risky loans due to self-interest incentives. Those results are in line with previous researches (Chiou et al., 2002; Kao and Chiou, 2002) that the financial leverage approaches such as collateralized shares 20.

(28) significant affect the attitude toward risk of the management and performance, more proportion of collateralized shares is observably not good to banks. As we described earlier, although collateralized shares give rise to discuss in recent years, it is rare to explore the relationship between collateralized shares, credit risk and performance in banking industry. A probable reason is that collateralized shares served as personal leverage approach is a budding approach. The result in this study argued that more bank managers do not serve their stocks as collateral also support this claim. 10 To contribute to our growing understanding of nature and influence of the collateralized shares, we redefined the variable CLR as a dummy variable Dit to observe the variation in the relationship between the collateralized shares, the proxy of return and risk. Let other variables hold constant. The model we use for the test is:. Yit = αi + β1HDRit + β2HDR2it + β3Dit + β4HDRit*Dit + β5HDR2it*Dit + β6EAit + β7SIZEit + εit. i=1…N, t=1…T. (12). where HDR represents the ratio of director shareholdings to total shares, D represents dummy variables of CLR. EA represents the equity to total assets ratio, SIEZ represents the total assets of the bank. We separate the row data into two groups: (a) CLR = 0 to median (.1758), (b) CLR = median to maximum (.9826). 11 The experimental arrangement for finding the threshold of variable CLR and the results are shown in Table 9. The results suggested that the group 2 is more significant related to performance and risk measures in opposite to the group 1. It supported the claim that highly proportion of stocks collateralized could be an incentive for mangers to misapply assets and make risky loans. Although the results of ROA and ROE are conflict, it is consistent after risk-adjusted when CLR is increasing. Furthermore, NPLR is higher when CLR is increasing. In conclusion, empirical results suggest that bank manager may make more risky investment due to highly proportion of shares collateralized, it make performance decreasing and risk risking. Those results are also in line with previous empirical results in this study and existed researches (Chiou et 10. See Appendix C in detail. There are 6 banks which the proportion of share collateralized are 0 and only 10 banks which the proportion of share collateralized are over 10%. 11 Kao and Chiou (2002) separated their samples into two groups. The criterion they adopted was .5 proportion of stocks collateralized. 21.

(29) al., 2002; Kao and Chiou, 2002).. 4.3 Robustness of Performance and Risk Results - Seasonal Effect Because we adopt quarterly data in our study, another important issue is that if performance on different month were anomaly. Such as the January effect (also known as the turn-of-the-year effect or the January anomaly) which is the most important calendar anomaly. The returns in January are much higher than in other months, and this phenomenon is due to smaller-capitalization stocks in the early days of the month. To mitigate this concern, we examine performance measures and risk measures for the first quarter to forth quarter. We then rerun the equation 11 and report empirical results in Table 10. Although significant level is lower then prior results due to fewer observations, the direction is almost consistent. We also introduce dummy variables to discriminate if seasonal anomaly exists. The model we adopt is:. Yit = αi + β1HDRit + β2HDR2it + β3 Dit + β4HDRit* Dit + β5HDR2it* Dit + β6EAit + β7SIZEit + β8Q2it + β9Q3it + β10Q4it + εit. (13). where HDR represents the ratio of director shareholdings to total shares, CLR represents The ratio of shares collateralized to director shareholdings. EA represents the equity to total assets ratio, SIEZ represents the total assets of the bank. Q2, Q3 and. Q4 are dummy variables. We consider the first quarter to be the reference group and detect if significant difference exist among them. The empirical results have been reported in Table 11, it suggested that there are not significant differences among individual quarter. In conclusion, this analysis indicates that performance and risk measures engaging in the seasonal effect results similar to the full samples, and suggests that our inference is not biased by the seasonal anomaly.. 4.4 Discussions This present study enhances the previous studies’ findings by providing a much more detailed examination of the importance of holding and the influence of the collateralized shares in banking industry. Based on the empirical results, two of our findings are worth summarizing: (a) The holding shares and the collateralized shares 22.

(30) are significantly associated with dependent variables, it suggests that they are both cardinal factors of the performance and the risk in banking industry. This finding is in line with our expectation, although merely little previous literature has asked this question in detail. (b) The higher proportion of the holding shares and the collateralized shares may not be a good message to banks. All of our empirical results have shown the pattern that the higher the holding shares and the collateralized shares, the higher the risk and the lower the performance. This finding is also in accord with the results of the previous studies which have tested performance and risk (Chiou et. al., 2002; Kao and Chiou, 2002), despite the fact that these studies used different measures and industries. Recalling the main issue in this paper: Could the collateralized shares be a factor for the board of directors and block shareholders to misapply bank’s assets? When the block shareholders own and the controlship of the bank and employ collateralized shares as their leverage approach, will their personal leverage behavior affect bank credit risk? Since deviation between the controlship and the ownership, the personal financial leverage approach such as the collateralized shares may reinforce the agency problem and this study supports this claim, reported above. However, as we discussed above, on the whole there has been relatively little literature in this issue until recently and we lack more empirical support. Although such the results may account in part for the reason that why does performance decrease and risk increase, any implications based on these preliminary findings should be treated with caution. In conclusion, this study has indicated that it might be a fruitful line of continued inquiry. In spite of different industries in comparison to previous studies, our findings also support the claim that the collateralized shares may have contributed to a lower return due to a higher risk, the monitoring mechanism should enforce relatively regulations more strictly to prevent banks from the agency problems. Especially to the insiders of influence such as board of directors or block shareholders, more strictly regulations and the disclosure of relatively information should be necessary.. 23.

(31) Chapter 5 Conclusions The fundamental question addressed in this study is whether the attitude of the board of directors toward risk will affect the bank risk and performance. The population of our research is domestic commercial banks. The examination period is from 4th quarter 1999 to 4th quarter 2007. Since OLS estimators could be inconsistent and meaningless if there were heterogeneity across individuals. To control for individual heterogeneity, the quantitative analysis of the panel data regression model was conducted. The empirical results support the claim that the collateralized shares may have contributed to a lower return due to a higher risk. Those results are also in line with previous researches (Chiou et al., 2002; Kao and Chiou, 2002). Because we adopt quarterly data in our study, another important issue is that if performance on different month were anomaly. We examine performance measures and risk measures for the first quarter to forth quarter. This analysis indicates that performance and risk measures engaging in the seasonal effect results similar to the full samples, and suggests that our inference in not biased by the seasonal anomaly. Such findings underscore the importance of enforcing relatively regulations and may provide policy implication for the regulators in the later monitoring requirement. Although our study has yielded findings that have empirical implications, there are limitations in this study. The first shortcoming in the current study is that we can only get listed bank information about the collateralized shares. The second limitation is insiders’ discretion to report the number. We can not ensure that the ratios we adopt are all proper numbers without manipulating by banks’ insider. Furthermore, we adopt the criteria when judging examination periods and samples, it is hard to prevent our empirical results from the nonselection bias.. 24.

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(36) Table 1: List of financial institutions (end of September 2007) Table 1 shows the list of financial institutions (end of September 2007). The first column indicates bank name. The second and the third column indicate that if banks were listed in the Taiwan Stock Exchange or the OTC during our examination periods, respectively. The forth column shows SIC code if banks were listed in the Taiwan Stock Exchange or the OTC during our examination periods. There are 40 Domestic Banks listed in Table 1, 26 banks listed in the Taiwan Stock Exchange and l banks listed in OTC market. Bank Name Bank of Taiwan Land Bank of Taiwan Taiwan Cooperative Bank First Commercial Bank Hua Nan Commercial Bank Chang Hwa Commercial Bank Bank of Overseas Chinese The Shanghai Commercial and Savings Bank Taipei Fubon Commercial Bank Co., Ltd. Cathay United Bank The Export-Import Bank of ROC Bank of Kaohsiung Mega International Commercial Bank Agricultural Bank of Taiwan China Development Industrial Bank Inc. Industrial Bank of Taiwan Standard Chartered Bank (Taiwan) Limited Taichung Commercial Bank King’s Town Bank First Capital Commercial Bank Hwatai Bank Shin Kong Commercial Bank Sunny Bank Bank of Pan Shin Cota Commercial Bank Union Bank of Taiwan The Chinese Bank Far Eastern International Bank Yuanta Commercial Bank Bank SinoPac Company Limited E. Sun Commercial Bank Cosmos Bank, Taiwan Bowa Bank Taishin International Bank Ta Chong Bank Ltd. Jih Sun International Bank EnTie Commercial Bank Chinatrust Commercial Bank Chinfon Commercial Bank Taiwan Business Bank. SE. Total: 40. 26. OTC. ○ ○ ○ ○. 5854 2802 2803 2801. ○ ○. 2830 2826. ○ ○. 2836 2806. ○. 2804. ○ ○ ○. 2807 2812 2809. ○. 2893. ○ ○ ○ ○ ○ ○ ○ ○ ○ ○. 2838 2831 2845 2843 2839 2840 2837 5810 2844 2847 5817 2849 2815. ○ ○ ○ ○. Source: Central Bank of the Republic of China (Taiwan) 29. Code. 2834 1. 27. period × × 1th 2000 to 4th 2007 4th 1999 to 4th 2007 4th 1999 to 4th 2007 4th 1999 to 4th 2007 × × 4th 1999 to 4th 2007 4th 1999 to 4th 2007 × 4th 1999 to 4th 2007 4th 1999 to 4th 2007 × × × 4th 1999 to 4th 2007 4th 1999 to 4th 2007 4th 1999 to 4th 2007 × × 3th 2005 to 4th 2007 × × × 4th 1999 to 4th 2007 4th 1999 to 4th 2005 4th 1999 to 4th 2007 4th 1999 to 4th 2007 4th 1999 to 4th 2007 4th 1999 to 4th 2007 4th 1999 to 4th 2007 4th 1999 to 4th 2005 4th 1999 to 4th 2007 4th 1999 to 4th 2007 4th 1999 to 4th 2007 4th 1999 to 4th 2007 4th 1999 to 4th 2007 × 4th 1999 to 4th 2007.

(37) Table 2: Samples and observations Table 2 shows samples and observations in our study. The examination periods in our study are from 4th quarter 1999 to 4th quarter 2007. The criteria we adopt when judging examination periods are (a) whether equity is negative, (b) whether the bank be takeover by FSC. We got rid of the same year and the last year when banks emerge the situations we listed above. Finally, we got an unbalanced penal data in our study.. 2801 2802 2803 2806 2807 2809 2811 2812 2815 2826 2830 2831 2834 2836 2837 2838 2839 2840 2843 2844 2845 2847 2849 2893 5810 5817 5854 Total. 1999 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 0 25. 2000 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 0 4 4 4 104. 2001 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 0 4 4 4 104. 2002 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 0 4 4 4 104. 2003 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 0 4 4 4 104. 30. 2004 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 0 4 4 4 104. 2005 4 4 4 4 4 4 0 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 3 4 4 4 103. 2006 4 4 4 4 4 4 0 4 4 4 4 0 4 4 4 4 4 4 4 4 4 4 4 4 0 4 4 96. 2007 4 4 4 4 4 4 0 4 4 4 4 0 4 4 4 4 4 4 4 4 4 4 4 4 0 4 4 96. Total 33 33 33 33 33 33 21 33 33 33 33 25 33 33 33 33 33 33 33 33 33 33 33 11 25 33 32 840.

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