Does First Financial Reform in Taiwan Improve the Performance of Focused Financial Firms? Chien-Ting Lin* Graduate Institute of Finance National Taiwan University of Science and Technology Taipei Taiwan & University of Adelaide Business School Adelaide SA Australia
[email protected] Tel: +61-8-8303-6461 Fax: +61-8-8223-4782 Meng-Chun Kao Department of Finance Yuanpei University of Science and Technology Hsinchu Taiwan
[email protected] Tel: +886-3-610-2367 Fax: +886-3-610-2366 *Corresponding author 1 Does First Financial Reform in Taiwan Improve the Performance of Focused Financial Firms? Abstract We examine the impact of first financial reform in Taiwan that removes the separation of commercial and investment banking activities on the performance of focused financial firms. Applying data envelopment analysis (DEA), we find that they fail to achieve efficiency gains in the post-reform era. In particular, commercial banks experience lower technical and pure technical efficiencies while insurance companies and securities firms also show little improvement in operating performance. Our findings suggest that the benefits of financial reforms on the diversified financial holding companies documented in recent studies do not extend to these smaller focused financial firms. The overall efficiency gains driven by the financial deregulation is therefore rather limited. As a result, further consolidations in the financial sector may continue as smaller focused financial firms find it difficult to compete against their larger and more efficient financial conglomerates. Keywords: Focused financial firms, Bank efficiency, First financial reform, Financial deregulation JEL classification: G21, G28 2 1. Introduction Following the global trend of financial liberalization for more than a decade, Taiwan introduced the Financial Institutions Merger Act in 2000 and Financial Holding Company Act in 2001 that removes the separation of commercial and investment banking activities imposed on its financial firms.