Optimal size of the financial services industry in Taiwan: a new DEA-option-based merger simulation approach

Abstract

In Taiwan the optimal number of financial holding companies (FHCs) has become an economic as well as political concern since 2002. This paper is different from most early papers by focusing solely on the measure of the change in synergies around the mergers of financial services companies, by using the data envelopment analysis and financial option models to simulate pro forma mergers in banking industry and to forecast the optimal number of FHCs in Taiwan. This paper extends the prior researches on optimal number of firms by simultaneously incorporating the concepts of operational efficiency and financial risks into the simulation framework, and using advanced econometric/financial methods to measure them. Results suggest a great potential for restructuring of the financial services industry in Taiwan, where the optimal number of FHCs is most likely to be eight, and 100% of corporate control is recommended as the most efficient form of corporate consolidation given the current states of the financial services industry in Taiwan.