Academic journal article International Journal of Management

The Determinants of the Capital Structure of Commercial Banks in Taiwan

Academic journal article International Journal of Management

The Determinants of the Capital Structure of Commercial Banks in Taiwan

Article excerpt

On the basis of an empirical analysis of determinants of capital structure in commercial banks in Taiwan, from a perspective of variables in the banks 'financial statements, and a comparative analysis between domestic commercial banks and local branches of foreign banks (Kuo and Lee, 1998; Kuo, 2000). However, under impacts from internationalization of finance and opening of markets, there have been structural changes in the financial market. Therefore, this study extends an analysis of the above researches in order to further explore these impacts on the capital structure of commercial banks in Taiwan. Investigating the financial performance of domestic banks and local branches of foreign banks between 1991 and 2000, we find the following: In terms of liquid reserve ratios, although domestic banks may have lower ratios than local branches of foreign banks, they are still maintained above the legal ratio of 7%. In terms of capital ratios, for domestic banks, both debt from deposit and debt from non-deposit decreased progressively, while for local branches of foreign banks increased progressively, in terms of profitability ratios, both domestic banks and local branches of foreign banks suffer a decline in probability ratios, while local branches of foreign banks still maintained better operating and non-operating income over domestic banks. These changes reveal that traditional activities of banks for deposits and loans are increasingly less important as determinants of capital structure in banking in the changing financial markets of Taiwan.

1. Introduction

Management of financial institutes is unlike that of any other business firms because banks act as both suppliers and demanders of funds, and they have high financial leverage. Lately, the global economic system has broken the boundaries of financial regulation and stimulating competition. The resulting increase in competition removed the profit advantages from banks in Taiwan, and posed greater challenges for bankers to manage assets and debts. Early commercial banks in Taiwan were founded in a highly regulated environment and tend to be government owned. However, in 1991, the Taiwan Ministry of Finance deregulated the establishment of new commercial banks in order to increase the competition between banks and also to increase financial efficiency. Since then, the banking industry has been transformed from an oligopoly into a new era of high competition. Since the critical difference between the banking industry and other businesses lies in the presence of governmental supervision and regulation, earlier researches into capital structure of bank tend to put their emphasis on the relationship between regulation and capital, thus neglecting the exploration of the correlation between a bank's financial statement and its practical operation from the perspective of capital structure.

Previous studies on determinants of capital structures attempted to define the optimal capital structure for firms from various perspectives, such as bankruptcy costs (Berger et al., 1995), agency theory (Jensen and Meckling, 1976; Smith and Warner, 1979), and asymmetric information (Myers and Majluf, 1984). Because of the factors affecting capital structures, we cannot truly affirm an optimal capital structure in practice. A broad range of issues have also been discussed in empirical studies that focus on determinants of capital structures, such as financial statements, company strategy, or managing decision. This study focuses only on the correlation between financial statements and decisions on capital structure. A review of previous studies reveals that the following factors from financial statement affect capital structure: firm size (Myers and Majluf, 1984), profitability (Myers and Majluf, 1984), non-debt tax shields (Modigliani and Miller, 1958; DeAngelo and Masulis, 1980), collateral value of assets (Myers, 1977), operating risks (Myers, 1977), dividend policy (Smith and Warner, 1979), and inflation (Homaifar et al. …

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