Financial Supervisory Commission Research Articles

Does increased monitoring enhance the credibility of financial reports? Evidence of auditing semi‐annual financial statements

AbstractDue to several financial scandals of Taiwan‐listed foreign firms (known as KY firms), the Taiwan Financial Supervisory Commission requires KY firms to disclose audited semi‐annual financial statements, which were reviewed before. Using the event study, we find higher cumulative abnormal returns for KY firms around the regulation announcement, suggesting the market's positive attitude towards the increase in the assurance level of semi‐annual financial statements. In addition, we apply a difference‐in‐differences test and find the improvement in earnings response coefficients, showing the market's increased perception of audit quality. Our findings should be of interest to regulators, practitioners, and researchers.

Does violation of regulations hurt firm value enhanced: Evidence from Taiwan banking industry?

This study investigates the impact of penalties, including sanctions, corrections, and fine payments, on firm value within the context of the banking industry on the Taiwan Stock Exchange (TWSE) from 2017 to 2021. Utilizing data from the Financial Supervisory Commission, we employ rigorous statistical methods, such as multiple regression and Petersen regression models, to discern whether these punitive measures affect firm performance. Intriguingly, our findings indicate that firms subject to financial sanctions and penalties in Taiwan experience an improvement in their firm value, challenging the conventional belief that such penalties erode value. We propose that this unexpected outcome may be attributed to the potential gains derived from expanding business activities, even in violation of banking regulations, outweighing the associated regulatory costs. By shedding light on this under-researched aspect of the literature, our study contributes to a broader understanding of how regulatory penalties impact firm value in the banking industry, thereby providing regulatory authorities with practical insights.

Analysis of the Main Difficulties and Future Operating Strategies of the Accounting Firm Industry

This paper discusses the main difficulties faced by the operation of the accounting firm industry, as well as the main operating strategies for it in the future. The data was sourced from the “2021 Investigation Report on the Accounting Firm Service Industry” conducted by the Financial Supervisory Commission in 2022, and statistical analysis was performed separately. Based on the analysis results, it is proposed in this study that the main difficulties in operation of the accounting firm industry are to reduce personnel costs as much as possible, train more skilled and excellent employees, and establish a sound client system. In terms of future operating strategy, efforts should be made to improve the service quality of the accounting firm, increase the number of professional assistants, strengthen staff training, and at least keep things ticking as far as possible, so as to provide managers with practical suggestions and improvement principles.

Operating efficiency of accounting firms based on different perspectives of human resource structures

This paper evaluates the operating efficiency of accounting firms from five perspectives of human resource allocations by sampling a total of 42 large accounting firms listed in the 2013 Survey Report on Accounting Firms compiled by the Financial Supervisory Commission. The paper adopts the three analytical models—CCR (Charnes, Cooper, and Rhode model), BCC (Banker, Charnes, and Cooper model), and Super SBM (a slack-based measure of super-efficiency)—in the data envelopment analysis (DEA) framework. The four revenue streams—auditing publicly listed companies, tax advisory services, management consulting, and business registration and others—are defined as outputs in the empirical study. On the other hand, human resource metrics are referred to as Inputs. These metrics are either financial (wages) or non-financial (job positions, education, age, business services, and CPA licenses). According to the research findings, 22 out of the 42 sampled accounting firms are operationally efficient, while seven are inefficient when measured using the five constructs of human resource inputs. In terms of the overall operating efficiency, the average efficiency values in the CCR model are the highest when measured with education, age, and practice as the three constructs of human resources. In the Super SBM model, the average efficiency values are the highest when evaluated with practice, education, and age. The efficient accounting firms are mostly measured using the human resource constructs of education (34 firms), age (32 firms), and job positions (30 firms). For both efficient and inefficient firms, tax advisory services and auditing publicly listed companies are the two major sources of revenue and competitive advantage. Meanwhile, the management consulting business still requires extra effort. This paper suggests that accounting firms should spend more on wages as an input in order to enhance employees' loyalty and boost their willingness to work. The non-financial human resource metrics for efficient firms are partners, master's degrees, 25–34 years old, and auditing services; employees without CPA licenses are, in fact, the major contributor to operating efficiency. Managers are advised to assign important tasks to these employees and provide them with generous remunerations and benefits so as to retain these high-caliber professionals and motivate them to create revenues for different businesses. The non-financial human resource metrics for inefficient accounting firms are associates, university degrees, 25–34 years old, and auditing services; employees with CPA licenses are the major contributor to operating efficiency. Thus, managers should fully utilize this human resource and empower them to go the extra mile in boosting revenue streams and improving service quality. Finally, neither the change in input attributes nor the application of different DEA models alters the outcome of performance evaluations. Moreover, this paper expects to provide a template for allocating human resources and synchronizing accounting firms' operating strategies.

MASs, alliance and performance: an evidence of SOX effects

PurposeTo maintain auditor independence, Section 201 of the Sarbanes–Oxley Act of 2002 (SOX) imposes restrictions on audit firms in rendering management advisory services (MASs) to audit clients. Responding to the requirement, audit firms establish a strategic alliance with consulting companies to expand their scope of services to alleviate the impairment of auditor independence. Taiwan follows the spirit of SOX in related laws and regulations. To investigate the effects of SOX on Taiwanese auditing industry, this study aims to examine the relationship between MASs and operating performance of audit firms.Design/methodology/approachThis study obtains empirical data from the 1989–2017 Survey Report of Audit Firms in Taiwan, published by the Financial Supervisory Commission (FSC). FSC administers the survey across all registered audit firms annually to collect business information on the auditing industry for macro-economic analysis and industrial policy development. The authors group audit firms into three categories: national, regional and local firms. Based on the structure-conduct-performance (S-C-P) theoretical framework, this study establishes the following cross-sectional regression equation to test the authors’ hypotheses.FindingsMain results indicate that national firms have better post-SOX firm and alliance performance. Both firm and alliance MASs contribute more to the performance of national firms after SOX.Practical implicationsThis study claims that national firms establish alliance with consulting companies for resource sharing but regional and local firms for tax-saving.Originality/valueConsistent with the economic theory of regulation and resource-based theory, SOX matters in Taiwan.

Seasoned equity offerings, return of capital and agency problem: Empirical evidence from Taiwan

Seasoned equity offerings (SEOs) and return of capital (ROC) are activities carried out by listed companies in the capital market. The decision of the company manager to engage in SEOs and ROC is actually in the scope of the agency mechanism. This paper explores the characteristics of SEO and ROC companies and whether SEOs and ROC will affect the company's performance and whether the agency problem will (partially) mediate the impact of SEOs and ROC on company performance. We use the annual data of domestic (Taiwan) listed companies from the Financial Supervisory Commission website and the Taiwan Economic Journal for the 2000–2018 period and adopt the Fama-French three-factor asset pricing model to hierarchical regression analysis to study the mediating role of the agency problem. The empirical results support that SEO companies are mostly in the expansion or growth stage and SEOs reduce company performance, both in the short term and long term. After considering free cash flow, the effect of SEOs on performance declines. The results support that ROC companies are mostly in decline stage and ROC increases long-term company performance. However, free cash flow does not affect the performance of the companies engaging in ROC. This research combines SEO and ROC data, and it is based on the perspective of the agency problem so that we can understand the impact on company performance.

The Impact of the Amendment of Taiwan’s Certified Public Accountant Act in 2007 on Large Accounting Firms

Taiwan’s Financial Supervisory Commission of the Executive Yuan promulgated the fully amended Certified Public Accountant Act in 2007, which directly led to significant changes in accounting law. From the perspective of the economic theory of law, this study investigates the amendment of the Certified Public Accountant Act resulting in an increase or decrease in the overall revenue and different revenue shares of accounting firms, and puts forward measures that should be taken by accounting firms and stakeholders. We focus on large accounting firms and divide the sample period into before and after 2008. This study uses the translog revenue function and revenue share functions of the public accounting industry, and based on the 1989–2017 Survey Report of Audit Firms in Taiwan, and we find that the amendment of the Certified Public Accountant Act has had a positive effect on overall revenue, increasing overall revenue and the overall management advisory services shares, and in reducing the overall accounting and auditing shares and tax services shares of large accounting firms. Additional analyses provide regulators with public policy implications and provide accounting firms with managerial information.

Market Reactions to Corporate Governance Ranking Announcements: Evidence from Taiwan

This study examines whether market participants react to the announcements of corporate governance ranking exercises. As a regulatory innovation, the Financial Supervisory Commission in Taiwan initiated and administered two ranking exercises, one in 2015 and the other in 2016, on all publicly listed companies. Adopting anchoring‐and‐adjustment theory, the study predicts that market participants will react strongly to the second announcement if the ranking obtained in the second exercise turns out to be better than the ranking in the first round. Employing an event study methodology, the study shows that market participants react positively and significantly to firms ranked in the top 50% in the second corporate governance exercise. Their reactions to the announcement are even stronger among those that did not list in the top 20% in the first exercise, but made it into the top 50% in the second one. Overall, our analyses support that anchoring‐and‐adjustment theory effectively explains market participants’ behaviour. Since the monitoring of the board of directors and investors may not effectively mitigate the potential moral hazard committed by family owners/executives, our empirical evidence demonstrates that a ranking exercise probably can be employed to supplement routine corporate governance disclosures made in annual reports, in order to strengthen the check‐and‐balance mechanism and reduce the risk of principal–principal conflicts. In conclusion, we discuss the implications of the research findings and propose directions for future studies.

Cost Efficiency Analysis of Local Commercial Banks in Taiwan

This study uses a stochastic frontier analysis (SFA) model to evaluate the relative cost efficiency of commercial banks in Taiwan in the wake of liberalization. The model is estimated using data made available through Taiwan's Banking Bureau and Financial Supervisory Commission. With data from before and after the 2008 financial crisis, our central result is that banks affiliated with bank holding companies (BHC) have become increasingly more efficient. While unaffiliated banks have generally increased their efficiency, they have not kept pace with respect to efficiency gains. Secondary findings are that, independent of ownership structure, both balance sheet and income statement composition affect efficiency. In particular, bank efficiency increases with growth in loans and capital prices. We also find evidence that labor productivity is a key explanatory factor behind efficiency differences across banks. As a result, a policy recommendation is made that banks invest in maximizing worker productivity. Finally, in addition to the insights gained from this study we contribute to the general literature on both bank efficiency and the use of the SFA model by applying it to new data in a new setting.

Review over the Recently Amended Regulations Governing the Use of Proxies for Attendance at Shareholder Meetings of Public Companies in Taiwan

股東會為公司最高意思決定機關，然現實上因公司規模擴大，股權分散，令現今股東會轉化為徵求委託書的過程，亂象紛呈，故有需要對股東使用委託書給予適當規範，但規範之制定應符合訊息公開、公平競爭以及誠實信用等原則。金管會對於委託書規則之制定向來採嚴格監理的態度。在委託書規則修正前，學界已批評徵求人持股門檻過高，豈料新修正委託書規則再提高門檻，其中對金融機構無限徵求規定最為嚴格。本文以為此修改似違股東行動主義；且區分金融機構與非金融機構為不同規定似亦缺乏合理基礎，就比較法之角度而言亦有再研議之空間。為此，本文將由委託書制度之起源利弊，法律對徵求委託書之限制，比較法觀點，評析新修正委託書規則並提出部分建議。 The shareholder meeting has the upmost power that makes decisions for a company. However, as a company grows on its scale, shares often disperse, turning share holders' meetings nowadays into competitions to solicit proxies for attendance at shareholder meetings. To prevent chaotic situations that come with, the use of proxies need to be regulated. The regulation shall comply with the doctrine of freedom of information, fair competition, and good faith. Financial Supervisory Commission has always had a stringent supervising front towards the regulation of soliciting proxies. There had been plenty critics, from the academic circle, that the threshold for solicitors' shares is too high. Much to everyone's surprise, the threshold is raised to even higher with the amendment of Regulations Governing the Use of Proxies for Attendance at Shareholder Meetings of Public. The threshold for financial institution to solicit unlimited amount of proxies are especially stringent. This article finds that this amendment might contradict with shareholder activism. Moreover, there seems to lack a legitimate ground for treating financial institution differently from the non-financial institution. More could be thought over from the point of view of comparative law. Therefore, this article reviews the recent amendment, taking into account the fountainhead, the pros and cons and the restrictions on the proxies in light of comparative law and provides some suggestions.

Value-relevance of the regulatory non-GAAP adjustments in the Korean banking industry

ABSTRACTIAS 39 requires firms to use the incurred-loss model for bad debt expenses. However, the Korean Financial Supervisory Commission requires banks to record additional loan-losses based on the expected-loss model. These non-GAAP adjustments include adjustments to book values as well as net income. We examine the incremental value-relevance of these non-GAAP adjustments and fail to find incremental value-relevance over unadjusted IFRS net income. However, the non-GAAP book value adjustment does have a partial, incremental value-relevance over unadjusted book values of equity. In addition, the non-GAAP loan-loss adjustments required by regulators may be disclosed either on the face of the financial statements or in the notes, but the disclosure location also appears to lack value-relevance.

How to test an insider trading law and its effectiveness: Price movements and comparative empirical data from Taiwan

Successfully enforcing insider trading law, as well as determining the effectiveness of that enforcement, is one of the quandaries of securities law. The main reason for this perplexity is that there is no tally of how many illegal trading activities are actually taking place. To solve this problem, this study proposes to use pre-announcement price run-up as a proxy for measuring the effectiveness of an insider trading law. After examining mergers and acquisitions data from Taiwan’s Financial Supervisory Commission from 2003 to 2016 and adjusting for market effect, we arrive at an average cumulative abnormal return of 6.62% before the official announcement of the events. This constitutes a 58.9% run-up compared with the post-announcement price increase.This investigation is important because it is the first to suggest an objectively empirical observation that approximates the overall size of illegal insider trading activities in a market. This method could serve as a sensitive tool for measuring temporal changes brought about by different legal arrangements within a single country or for measuring comparatively across different legal regimes.

How to Test an Insider Trading Law and Its Effectiveness: Price Movements and Comparative Empirical Data from Taiwan

The enforcement of insider trading law, as well as its effect, has been a quandary in securities law. The main reason for this perplexity comes from the fact that there is no tally of how many illegal trading activities are actually taking place. The exchange of information that incites insider trading is secretive or disguised, and the purported victim has no sense of being harmed or defrauded. If unreported, the crime may go uninvestigated. So, despite the highly publicized insider trading cases that are hailed in newspapers or the victories won in court, it is unclear how many other activities go undetected and how solid the acclaimed victory truly is. This study proposes and applies a method for testing the effectiveness of a law against insider trading through an event study. We use pre-announcement price run-up as a proxy for measuring the effectiveness of Taiwanese insider trading law. After examining mergers and acquisitions data from Taiwan’s Financial Supervisory Commission from 2003 to 2016 and adjusting for market effect, we arrive at an average cumulative abnormal return of 6.62% before the official announcement of the events, which constitutes a 58.8% run-up compared with the post-announcement price increase. This investigation is important because it is the first to suggest an objectively empirical observation that approximates the overall size of illegal insider trading activities in a market. More importantly, this method could serve as a sensitive tool for measuring temporal changes brought about by different legal arrangements within a single country or for measuring comparatively across different legal regimes.

Effect of the critical human resource attributes on operating performances

PurposeThis paper aims to explore the relationship between human resource attributes and the operating performances of accounting firms by sampling data from the 2012-2013 Survey Report on Accounting Firms, as compiled by the Financial Supervisory Commission in Taiwan.Design/methodology/approachMultiple regression analysis is conducted to measure operating performances with various measurements, such as operating profits and business diversification. The independent variables include male to female ratio, percentage of senior executives, percentage of employees with higher education backgrounds, organizational vitality, human resource diversity, percentage of employees with certified public accountant (CPA) qualifications and human resource costs (HRCs). The control variables are the firm history, market shares and ownership structures since the inception of the firms.FindingsThe empirical results regarding the operating profits model suggest that the higher the male to female ratio, the percentage of employees with higher education backgrounds, organizational vitality, human resource diversity, percentage of employees with CPA qualifications and HRCs, the greater the operating profits. Meanwhile, the findings regarding the business diversification model indicate that the higher the male to female ratio, percentage of senior executives and human resource diversity, the greater the business diversification.Originality/valueIt is intended that the research findings can assist the management of accounting firms to understand the human resource attributes critical to operating performances, which will help to enhance the competitiveness of employees, mitigate the operating risks and improve the operating performances of the firms.

Financial literacy and participation in the derivatives markets

We set out in this study to determine whether individuals with higher levels of financial literacy are more likely to be active participants in the derivatives markets. Our empirical results, based upon an official National Survey undertaken by the Financial Supervisory Commission of Taiwan, reveal that even after controlling for stock market participation rates, financial literacy represents a significant benefit to individuals since it helps them to lower the entry barriers to purchasing complex derivatives products. We also find that household wealth, gender, residential location and diverse sources of information have significant effects on participation rates in the derivatives markets. Furthermore, when taking into consideration issues of accessibility or measurement error, the positive effects of financial literacy on derivatives market participation are found to remain largely unchanged.

Financial literacy, financial advisors, and information sources on demand for life insurance

A logistic regression model was used to investigate the effects of financial literacy, financial advisors, and information sources on life insurance participation. Our empirical findings suggest that people with high financial literacy are more likely to purchase life insurance and that consultations with financial advisors and conversations with family members and friends are both positively associated with the demand for life insurance. Participant characteristics, such as age, gender, marital status, working status, and personal income, are also major factors affecting the demand for life insurance. Moreover, the Taiwan Financial Supervisory Commission education program can increase the demand for life insurance.

How to Test Your Insider Trading Rule and its Effectiveness?: Price Movements and the Empirical Data from Taiwan

This study focuses on the rule prohibiting insider trading in securities law and its effectiveness. In theory, a pending M&A activity has great potential to induce substantial price movement in the public market after its announcement. However, a prohibition of insider trading prevents people who have the knowledge about a pending M&A from using this information to garner the price difference, when a latter announcement leads to increasing public price. In this view, in an ideal world, when a prohibition of insider trading is in place and taking its full effect, the price should only start to move toward the target price right after the news of M&A activity is publicly announced. Conversely, if the stock price starts to reflect the target price before its public announcement, that implies a likely leak of private information and a failure of insider trading prohibition rule. In other words, through observing the price movements before and after the mergers and acquisitions event samples, we can produce an approximation of the effectiveness of the insider trading law in place. This paper examines M&A data in Taiwan, collecting from the disclosure system administered by Taiwan Financial Supervisory Commission from 2004 to 2016, as evidence to test the actual implementation of insider trading law in Taiwan and how forceful it is. The pattern of information leakage, when observed, provides a valuable understanding for the law enforcement department and its improvement. This result of empirical investigation, and the insight it provides, are particularly important because (1) insider trading is considered to be highly detrimental to the securities market and investor confidence, and (2) insider trading activities are not directly observable due to the secretive way the related information is exchanged and thus hard to gauge its level of actual occurrence.

How to Test Your Insider Trading Rule and Its Effectiveness?: Price Movements and the Empirical Data from Taiwan

This study focuses on the rule prohibiting insider trading in securities law and its effectiveness. In theory, a pending M&A activity has great potential to induce substantial price movement in the public market after its announcement. However, a prohibition of insider trading prevents people who have the knowledge about a pending M&A from using this information to garner the price difference, when a latter announcement leads to increasing public price. In this view, in an ideal world, when a prohibition of insider trading is in place and taking its full effect, the price should only start to move toward the target price right after the news of M&A activity is publicly announced. Conversely, if the stock price starts to reflect the target price before its public announcement, that implies a likely leak of private information and a failure of insider trading prohibition rule. In other words, through observing the price movements before and after the mergers and acquisitions event samples, we can produce an approximation of the effectiveness of the insider trading law in place. This paper examines M&A data in Taiwan, collecting from the disclosure system administered by Taiwan Financial Supervisory Commission from 2004 to 2016, as evidence to test the actual implementation of insider trading law in Taiwan and how forceful it is. The pattern of information leakage, when observed, provides a valuable understanding for the law enforcement department and its improvement. This result of empirical investigation, and the insight it provides, are particularly important because (1) insider trading is considered to be highly detrimental to the securities market and investor confidence, and (2) insider trading activities are not directly observable due to the secretive way the related information is exchanged and thus hard to gauge its level of actual occurrence.

A Case Study On Big Bath Earnings Management With Large Shareholder Changes With A Focus On The Setting Of Loan Loss Allowances For A Savings Bank

The management performance of a bank is highly affected by bad debt the bank has written off related to loan receivables. When this happens, discretionary action regarding the setting of the allowance for loan losses is enabled, through which the big bath phenomenon often occurs. The present study investigates this big bath phenomenon. In particular, it attempts to determine whether it occurs when the allowance for loan losses is set during a specific period of time – namely the period in which large shareholders change and the new shareholder brings a capital influx. An examination was carried out through a case analysis for a savings bank. Z Savings Bank was selected, and for comparison and analysis, similar savings banks were studied. From 2002 to 2014, large shareholders at Z Savings Bank changed four times. The analysis revealed that when individual-to-individual shareholder changes took place, the big bath phenomenon did not occur. However, in two cases, one in 2011 and the other in 2014, individual-to-company shareholder changes took place. In these two cases, management performance showed high variations, and it was confirmed that the typical big bath phenomenon occurred. According to the analysis, this was due to an environmental factor that caused distressed debts to be reflected at their maximum value. This was done via an inspection process that was triggered when the capital held by the large companies – both Korean and foreign – was brought in. Specifically, the bad debt being written off and the allowances for loan losses were intentionally exposed in the accounting in order to provide transparency when the shareholder changes took place. This phenomenon occurred because the Financial Supervisory Commission reinforced the obligatory allowance-setting rate to ensure the soundness of assets.

Human Capital, Organizational Demography and Organizational Performance: The Analysis of CPA Firms in Taiwan

<p>Many studies indicate a positive correlation between human capital and operating performances for professional service providers. This paper takes a step further and explores the impact of demographic profiles on financial performances, given the lack of research on this front in Taiwan. To clarify the relationship between these factors, this paper takes a resources-based view in the examination of the influence of human capital and demographic profile on operating performances. Sample is sourced from “Survey of CPA Firms in Taiwan” issued by the Financial Supervisory Commission in 1999-2012. The empirical results suggest that (1) the greater the human capital, the better the organizational performances; (2) the higher the heterogeneity of educational backgrounds in the demographic mix, the better the organizational performances; (3) the heterogeneity in age in terms of the interaction between human capital and demographic profiles has a positive effect on organizational performances.</p>