Academic journal article International Journal of Management

An Investigation into the Differences between the Book Value and Market Value of Commercial Banks: An Empirical Study

Academic journal article International Journal of Management

An Investigation into the Differences between the Book Value and Market Value of Commercial Banks: An Empirical Study

Article excerpt

With increased financial internationalization and liberalization, how to improve the enterprise's value has become an important subject in the development of the financial service industry. The purpose of this study is to search for the 'value' of the banks and to determine the main reasons for the difference between book value and market value in the bank industry. We use the MV/BV model to test 32 listed commercial banks in Taiwan. Our results indicate that the explanatory power of the model in the paper is substantially enhanced when the bottom-line net income is further decomposed into its components. We conclude by describing the impact of efficiency scores and non-performing loan ratios (NPLRs) on the different types of banks, based on our empirical results.

Introduction

In order to promote financial liberalization and internationalization, the Taiwan government has over the past couple of decades significantly opened the door for new private banks to be established. This has resulted in the number of financial institutions in Taiwan doubling in recent years and has brought about excessive competition between banks. Hence, the asset-liquidity ratios of banks have tended to be low and their NPLR's have remained high. The average NPLR for financial institutions in Taiwan increased markedly within a period of only six years from 3% in December 1995 to 8.16 % in December 2001. Of particular concern is the NPLR for community financial institutions that reached as high as 16.39% in December 2001 and is still climbing. By contrast, the average NPLR for financial institutions in Taiwan remained consistently below 2.5% for a long period of time before 1995 and grew only very slowly. Nevertheless, Taiwan has since 1995 been affected by a cross-Strait missile crisis, the Southeast Asian financial crisis, an all-encompassing global economic recession, a growing "Internet bubble," as well as several cases of fraudulent activity involving financial institutions. all of these developments have caused the NPLRs of Taiwan's financial institutions to rise sharply. There are many studies that focus on research regarding the borrower's credit and the behavior of management in relation to the NPL issues of financial institutions. (Orgler, 1970; Rakes, 1973; Cowen and Page, 1979; Saunders, Strock andTravlos, 1990; Wahen, 1994; Lawrence and Arshadi, 1995; Berger and De Young, 1995; Chen, Steiner and Whyte, 1998). We believe that these arguments and concepts can serve as a helpful reference in regard to NPL issues resulting from the current financial institution.

After entering the so-called third wave economy, an enterprise's product is transformed from being a tangible product into an intangible product, and the source for creating revenue shifts from tangible assets to intangible assets. Therefore, the book value of an enterprise and its market value are quite different and the former cannot adequately reflect the enterprise's intrinsic value. Ittner and Larcker ( 1998) point out that customer satisfaction and stock prices are significantly positively correlated, whereas customer satisfaction cannot completely reflect the accounting book value of the company. Lambert (1999) obtains similar results by using American Customer Satisfaction Index (ACSI) data. Amir and Lev ( 1996) indicate that there are complementarities between the financial and non-financial information. If we were to only use financial indicators in the traditional way, this might result in a biased inference. To a company that focuses its core value on intangible assets, non-financial indicators that are related to the company's value are even more important than traditional financial indicators. Furthermore, when Trueman, Wong and Zhang (2000) analyze the relationship between financial information and the market-to-book ratio, they find that the addition of non-financial indicators on the basis of net income provides significant incremental explanatory power in terms of the valuation of Internet firms. …

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