Journal of Accounting Review  2017/07
Vol.65   117-172
DOI:10.6552/JOAR.2017.65.4

Relationship between Major Business Units, Diversification, and Operational Efficiency of Taiwan’s Financial Holding Companies: The Role of Corporate Governance

Abstract

This study investigates the operational efficiency of 14 financial holding companies operating in Taiwan from 2003 to 2010. The DEA-CCR method developed by Charnes, Cooper, and Rhodes (1978) is used to measure the relative operational efficiency of financial holding companies. The empirical results indicate that a 42% improvement in the operational efficiency of the companies is necessary in the study sample. The main reasons for operating inefficiency were pure technical and scale inefficiencies. This study also examines the determinants of the operational efficiency of financial holding companies. The results show that financial holding companies with a major business unit, most often a bank, have lower operational efficiency in comparison with life insurance and securities firms. The ratio of revenues from a major business unit to total revenues from the financial holding company positively and significantly affects operational efficiency. The relationship between the diversification level and operational efficiency is significantly positive for the period before the 2008 financial crisis and significantly negative for the period after the 2008 financial crisis. Furthermore, this study analyzes the role of corporate governance and finds that for the period before the 2008 crisis, board size moderates the relationship between diversification level and operational efficiency. However, for the period after the 2008 crisis, board size positively affects the relationship between diversification level and operational efficiency. However, the shareholding ratio of government has the opposite results in terms of board size.