The Impact of a Diversified Strategy and Annual Report Information Disclosure on Market Performance: Evidence from Taiwan s Financial Industry Firms

Transcription

1 The Impact of a Diversified Strategy and Annual Report Information Disclosure on Market Performance: Evidence from Taiwan s Financial Industry Firms Dr. Ou-Yang Hou, Kun Shan University, Tainan, Taiwan ABSTRACT This study examines the association between a diversified strategy, annual report information disclosure and the market performance of financial industry firms in Taiwan. Using a sample of 88 interlocking groups and observations of 366 financial firms listed on the Taiwan Stock Exchange (TSE) and Taiwan s over-the-counter market from 2003 to 2007, the Entropy method is adopted to measure the degree of group diversification. Following the regulations of the Security and Futures Institute evaluation system in Taiwan, content analysis is used to measure the degree of annual report information disclosure. The empirical results show that the group's total diversification (DT) and group related diversification (DR) have an insignificantly positive effect on a company s Tobin s q, while group unrelated diversification (DU) has an insignificantly negative effect on a company s Tobin s q. Annual report disclosure also has an insignificant and positive impact on Tobin s q. However, financial and operational information disclosure and components of the board of directors and the ownership structure disclosure have significantly negative and positive effects on company's Tobin s q, respectively. The contributions of this research are as follows: First, the strategic direction of firms as a key factor in the market performance of financial industry firms is considered. Secondly, this paper provides empirical evidence of the impact of annual report information disclosure on the market performance of financial industry firms in Taiwan. Keywords: Diversified Strategy, Annual Report Information Disclosure 1. INTRODUCTION In recent years, along with technological development, the new economic tide taking the knowledge as the foundation engulfed the entire world. In this era of a knowledge-based economy, business economic value and the wealth originating from it were no longer solely dependent on the entity product the production, but came from the intangible asset creation and the utilization of such assets. Statistical data from the Executive Yuan Planning headquarters in Taiwan show that the industry proportion dropped from 35.90% to 35.44% from 2004 to 2009, while the service industry proportion rose from 57.54% to 59.25%. This data outlines the change in path of Taiwan s economic structure. The service industry had an important function in terms of economic localization and reforms in Taiwan, and public opinion proposed the point of view of the knowledge-based economy and innovation. Both the diversification strategy and the corporate governance mechanism are key determinants in acquiring the competitive advantage of Taiwan s financial industry. On the large scale, internationalization and diversification are the most widely discussed items regarding financial organizations, because along with the monetary industry s competition there are constant product innovations, and the global layout and industrial structure are rapidly changing in Taiwan. In November, 2009 Taiwan and mainland China signed the Financial Overseeing Memorandum of Understanding (M.O.U.), and in June 2010, the two entities signed the Economic Agreement of Cooperation Framework (ECFA). As a result, the original manufacturing cost, the speed, and the quality superiority have all gradually become the basic important features of competition, the financial enterprise wants to create constant value and profits, diversification is used to promote innovation ability, and relevant information is quickly revealed through company websites and annual reports, in order to obtain the stakeholders trust. According to statistics from the Executive Yuan Planning headquarters in Taiwan, from 2003 to 2007, the total number of financial organizations in Taiwan declined from 433 to 417, the Branch office number rose from 5,930 to 5,977, the number of deposit monetary organizations (total experts) dropped from 45 to 39, the number of deposit monetary organizations (branch) increased from 2,884 to 3,189, the number of small business banks (total experts) fell from 5 to 1, the number of small business banks (branch) was reduced from 2,884 to 124, Taiwanese branches of foreign banks (total experts) fell from 36 to 32, Taiwanese branches of foreign banks (branch) increased from 69 to 83, trust investment corporations(total expert) fell from 3 to 1, the trust investment subsidiary companies declined in number from 28 to 6, the number of life insurance corporations stayed at 29, and the number of life insurance subsidiary companies rose from 130 to 136. The establishment of the financial holdings company (FHC) The Business Review, Cambridge * Vol. 16 * Num. 2 * December *

2 was Taiwan's financial organization innovation during the last 10 years. Mergers and acquisition has become the quickest way to expand the scale of financial organizations in Taiwan. At present, Taiwan has 15 financial holding companies, where the FHC groups includes banks, bill companies, life insurance companies, securities companies, futures companies, investing trusts, investing consultants, asset management providers, and so on. In this research it is argued that, if the financial group enterprise can effectively benefit the intangible assets, the extendibility, and the scope economy through the diversification strategy, these benefits should surpass the agency costs or the resources deployment inefficiency costs. For emerging markets like Taiwan, the market's transaction cost of information and technology trading is high, so there is a need to obtain the innovation gain and scope economy through a group diversification strategy, such as an internal mechanism. In the context of the background discussed above, the first motive of this study is to explore the effects of the financial group enterprise diversification strategy on market performance. First, this paper focuses on the effect of diversification on firm performance exploring whether the diversification strategy of financial companies in a group enterprise has a positive or negative effect on firm performance. The network relations within the group enterprise are advantageous for enabling information sharing with customers. Next, this study focuses on forms of group diversification (including related diversification and non-related diversification) and how they influence firm performance. The Taiwanese government responded to the recent stock market crisis of confidence by imposing the Corporate Governance Best-Practice Principles in 2002 and launching the Information Transparency and Disclosure Rankings System in 2003 for companies listed on the Taiwan Stock Exchange Corporation and the Gre Tai Securities Market (namely, over-the-counter market) in order to strengthen corporate governance practices. The importance of corporate governance has received substantial attention from stakeholders, such as regulators, financial institutions, suppliers, customers, investors, and academic scholars in Taiwan because they assume that corporate governance, and corporate information disclosure in particularly, affect firm performance and market valuation. Empirically much less is known about the effectiveness of the newly initiated Information Transparency and Disclosure Rankings System of governance mechanisms regulations. Given the emergence of the Taiwan s stock market, an investigation of the association between annual report disclosure practices and firm performance among a sample of Taiwanese listed companies from the financial industry will add to the literature this area. Consequently, the second motive of this study is to shed light on the effectiveness of annual report disclosure and to provide an empirical insight on the relationships between annual report disclosure and firm performance in the Taiwanese context. The remainder of this study is outlined as follows: Section 2 presents the literature review and development of the hypotheses, while Section 3 includes the research methods and design. Section 4 presents the empirical analysis, results, and discussion with conclusions and recommendations following in Section LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT 2.1. Diversification and performance Taiwanese scholars Lin (2001) selected 33 listed and OTC banks from 1996 to 1998 and found that related and unrelated diversification strategies do not have a significant association with the financial performance of banks. Young (2008) selected 116 group enterprises with a total of 309 non-financial firms in 2003 to include in the sample and found that the related diversification strategy does not show a significant positive correlation, while the undiversified and total diversified strategies of the group have a significantly negative relationship with market performance. Ou-Yang and Chang (2009) selected 273 group enterprises with a total of 634 non-financial firms in 2006 and found the total diversification indicator (DT) to have a significantly negative effect on ROA. Their result supports the idea that "diversification would reduce the corporate performance." However, related diversification (DR) and unrelated diversification (DU) may have different impacts on company performance. The regression results of their model showed that the effects of group DR and DU on a company's ROA are insignificantly positive and negative, respectively, This indicates that the group DR enables subsidiaries to enter familiar industries, and DR may be the main factor enhancing corporate performance, whereas unrelated diversification can enable the group s subsidiaries to enter new industries, and DU may be the main factor leading the group subsidiaries to low corporate performance. The Business Review, Cambridge * Vol. 16 * Num. 2 * December *

3 Ou-Yang and Huang (2009) found that the total diversification indicator (DT) has an insignificantly negative effect on financial institutions Tobin s q. In addition, because the overall diversification can be divided into related diversification and unrelated diversification (Wade and Gravill, 2003; Young, 2008; Ou-Yang and Chang, 2009) increasing the degree of related diversification in the group could enhance the group s R & D positive spillovers. In regards to unrelated diversification, Young(2008) and Ou-Yang and Chang (2009) found that, as the degree of unrelated diversification increases, group R & D positive spillovers decrease. Ou-Yang and Huang (2009) found that the related (non-related) diversification indicator (DR or DU) also has an insignificantly positive (negative) effect on financial institutions Tobin s q, respectively. Based on the above discussion, this study proposes the first hypothesis (H1) as follows with further division of H1 into two subordinate hypotheses: related and unrelated diversification. Hypothesis 1 and its two subhypotheses (H1-1 and H1-2) are stated below H1: Group diversification can enhance market performance in the financial group, that is, the greater the extent of the group s total diversification, the greater the positive impact on subsidiaries market performance. H1-1: The greater the extent of the group related diversification, the greater the positive impact of the financial group's market performance among subsidiaries. H1-2: The greater the extent of the group unrelated diversification, the greater the negative impact of the financial group's market performance among subsidiaries. 2.1 Information Disclosure and Performance Corporate transparency and full disclosure of information are core characteristics of the corporate governance mechanism and are regarded as an important factor in the quality of corporate governance (OECD, 1999). Similarly, Beeks and Brown (2006) contend that firms with more effective corporate governance offer better informative disclosures. Ou-Yang (2008) used listed companies on the Taiwan Stock Exchange from 2001 to 2006, and found that information transparency has significantly positive effects on Tobin s q. Chi (2009) provides evidence that is consistent with Taiwanese regulators initiatives, wherein good corporate disclosure practices play a significant role in firm performance. Ou-Yang and Huang (2009) found that financial and operational information transparency has an insignificantly positive impact on market performance, but components of the board of directors and ownership structure have a significantly positive impact on market performance. Ou-Yang and Huang (2010) used listed companies on the Taiwan Stock Exchange from 2005 to 2008 and found that financial and operational information disclosure and transparency, components of board of directors and the ownership structure disclosure and transparency and total score of the annual report information disclosure all have a significantly positive effect on firms Tobin s q. These results indicate that a greater degree of information disclosure and transparency can reduce internal and external information asymmetry among investors, creditors and insiders. Institutions and general investors will be glad to invest in firm stock and trust the firm s declarations. This will help the company s performance or value creation, indicating that the greater the extent of annual report information disclosure and transparency, the better the business market performance. After verifying the financial diversified strategy on firm performance, the second motive of this study is to explore how the financial group enterprise's annual report information disclosure (including financial and operational disclosure and components of the board of directors and ownership structure disclosure) affects the group company's performance. Young (2008), Ou-Yang and Chang (2009), and Ou-Yang and Huang (2009) are the most relevant studies on this topic. Based on the above discussion, this study proposes the second hypothesis (H2) as follows and further divides H2 into two subordinate hypotheses based on financial and operational information disclosure and transparency, and components of board of directors and the ownership structure disclosure and transparency. Hypothesis 2 and its two sub-hypotheses (H2-1 and H2-2) are stated below. H2: Annual report information disclosure can enhance market performance in the financial group, that is, the greater the extent of the group s annual report information disclosure, the greater the positive impact of the financial group on subsidiary market performance. H2-1: The greater the extent of the group s financial and operational information disclosure and transparency, the greater the positive impact of the financial group's market performance among subsidiaries. H2-2: The greater the extent of the group s components of board of directors and the ownership structure disclosure and transparency, the greater the positive impact of the financial group's market performance among subsidiaries. The Business Review, Cambridge * Vol. 16 * Num. 2 * December *

4 3. RESEARCH METHODS AND DESIGN 3.1 Definition of Variables Dependent variable: Group subsidiary performance Tobin s q is probably the most widely used market performance measure in empirical corporate finance (Ou-Yang, 2008; Chi, 2009; Ou-Yang and Huang, 2009, 2010 ). In the present study, Tobin s q is defined as the ratio of the book value of debt plus market value of equity to book value of assets in the years from 2003 to Group total diversified indicators (DT) As the SIC and the HHI Index do not make a clear distinction between related and unrelated diversification, and Rumelt s strategy method would provide too subjective of a classification, this study referred to the diversification measure of Young (2008), Ou-Yang and Chang (2009), and Ou-Yang and Huang (2009), adopting the Entropy method to calculate the extent of the group diversification. Diversification was further divided into related diversification and unrelated diversification. We introduce the calculation of the Entropy method as follows: Suppose a group enters the number of L product markets, and let Pr to be the amount of r product sales relative to the amount of the group's total sales ratio. Thus, the group's total diversification indicators (DT) are as follows: L DT= P r ln( 1/ P r ) (1) r= 1 This formula considers two elements of diversification: (1) the number of product markets the group enters, and (2) the weight of the amount of each product s sales within the group's total net sales. This study further distinguishes diversification into related and unrelated diversification, where the overall diversification of the group (DT) is equal to group-related diversification (DR) plus group unrelated diversification (DU). Assume that the group enters products gathered in n industries ( n). DR is defined as the extent of diversification in the group s industry-product related diversification. The formula is expressed as follows: DR s = r (2) = 1 where m is the product number in s industries to which the groups enters, m s s P r ln(1/ P ) s P r is the relative ratio of the amount of sales for r products to the total amounts of sales in industry s and n is the number of industries to which the group organizations enter, so the extent of the group related diversification (DR) is a function of DRs (s = 1,..., n), that is all n industries related diversification weighted average: n s DR s P DR= s= 1 where P s is the relative ratio of the amounts of sales in industry s to the total amounts of sales of the group. Unrelated diversification (DU) measures the extent of the group's products entering different industries, where the variables are defined as the weighted average of the amount of sales in all industries into which the group enters. The formula is as follows: n DU= s s P ln( 1/ P ) (4) s= 1 Industries are distinguished according to the Republic of China Executive Yuan's Directorate General of Budget Standard of Industry Classification s industry median classification. The products are distinguished according to the industrial fine classification of various products. Groups with the same industrial production of different products are defined as having related diversification, while groups with firms entering different industries are defined as having an unrelated diversification strategy. If the value of the related diversification is calculated as being higher in a group, the degree of the group s product line expansion in the same industry is greater. If the value of unrelated diversification is calculated as higher in a group, the group has entered a greater number of different industries Annual report information disclosure This study follows the 6 th Information Disclosure and Transparency Ranking System and the fourth category conducted by the Securities and Futures Institute in Taiwan to calculate annual report information disclosure scores (Ou-Yang and Huang, 2009, 2010). We adopt the content analysis method and select 49 indicators (39 to 87 items), using a dichotomous procedure in which an item scores one if disclosed and zero if not disclosed. (3) The Business Review, Cambridge * Vol. 16 * Num. 2 * December *

5 This approach is conventionally termed the unweighted approach (Hossain, 2000;Hossain and Hammami, 2009). We then construct an information indicators score sheet, where the higher the score, the greater the transparency of information. The information disclosure score is calculated as follows: For annual report information disclosure indicators see Appendix. We then divide annual report information disclosure into financial and operational information disclosure and transparency (39 to 67 items) and components of board of directors and the ownership structure disclosure and transparency (68 to 87 items). Individual company information transparency = individual companies indicators score/indicator score sheet for all items Control variables (1) Company size (SIZE) Hossain and Hammami (2009) pointed out that company size is identified as a significant explanatory variable in explaining variation in the level of voluntary disclosure in previous studies. Studies have shown that larger companies perform better than smaller firms, so in this study we control for the size of organizations in order to exclude the potential impact of unrelated factors (Keats and Hitt, 1988). We also referred to the research of Young (2008), Ou-Yang and Chang (2009), and Ou-Yang and Huang (2009, 2010) in which company size is based on previous period net sales or total assets. Skewness is mitigated by utilizing the natural logarithm of size in the regression analysis, consistent with prior studies (Glaum and Street, 2003). Ou-Yang and Chang (2009) and Ou- Yang and Huang (2009) found that the greater firm the size of a firm, the better the firm s performance (2) Company age (AGE) Owusu-Ansah (1998) argued that the extent of a company's disclosure may be influenced by its age, with age proxying for the form's stage of development and growth.he argued that younger companies may suffer competitive disadvantage if they disclose certain items such as information on research expenditures, capital expenditures, and product development. Company age might affect the company's operating performance (Khanna and Palepu, 2000; Zhao and Luo, 2002; Young, 2008; Ou-Yang and Chang, 2009). In this study, we use the research year minus the year the company was established to measure company age, controlling for the influence of this on a company s market performance. Ou-Yang and Chang (2009) and Ou-Yang and Huang (2009) found that the older the firm age, the lower the firm s accounting and market performance. (3) Group size (GSIZE) Haniffa and Cooke (2002) suggested that a firm s structural complexity may be significant in explaining variability in the extent of disclosure. Hossain and Hammami (2009) pointed out that the level of voluntary disclosure is positively associated with the complexity of the firm. The greater the number of group network system members, the greater the group s bargaining power, and group size will bring greater profits and growth for group members. In order to control for the effect of the group s network size on corporate performance, this study follows the methods of Khanna and Palepu (2000), Young (2008) and Ou-Yang and Chang (2009), using the number of members to measure group size. The greater the number of companies in the group, the greater the group s network system (Ou-Yang and Chang, 2009; Ou -Yang and Huang, 2009). (4) Net operating profit (NOP) As the company's market performance will be affected by its profitability, this study adopted net operating profit to measure the profitability of the company. We incorporate NOP into the empirical model as a control variable. NOP is defined as net operating profit divided by net sales. Ou-Yang and Chang (2009) and Ou-Yang and Huang (2009) found that the greater the firm s net operating profit, the higher the firm s accounting and market performance Empirical model In this study, Models 1(equation (5)) and 2 (equation (6))are used to explore the impact of the financial group s diversification strategy and annual report information disclosure on subsidiary performance. The difference between the two models is that in Model 2 we further divide total diversification into related and unrelated diversification. In addition, we further divide annual report information disclosure into financial and operational information disclosure and transparency, components of the board of directors and the ownership structure disclosure and transparency. Tobin q i=α 1 +α 2 DT i +α 3 ln(size i )+α 4 ln(age i )+α 5 GSIZE+α 6 NOP i +α 7 DIS_ACCU_T i +ε i (5) The Business Review, Cambridge * Vol. 16 * Num. 2 * December *

6 Tobin q i =β 1 +β 2 DR i +β 3 DU i +β 4 ln(size i ) +β 5 ln(age i ) +β 6 GSIZE+β 7 NOP i +β 8 DIS_ACCU1 i +β 9 DIS_ACCU2 i +ε i (6) Where, Tobin s q i = i company's market performance indicators; DT i = i group s indicators of total diversification; DR i = i group s related diversification indicators; DU i = i group s diversification of unrelated indicators; SIZEi = i company sales (natural logarithm value); ln (AGEi) = i company s age (natural logarithm value); GSIZEj = j group s network system members; NOPi = i company s net operating profit; DIS_ACCU_T i = i company's annual report information score (39 to 87 items); DIS_ACCU1 i = i company's financial and operational information disclosure and transparency score (39 to 67 items); DIS_ACCU2 i = i company's components of the board of directors and the ownership structure disclosure and transparency score (68 to 87 items); and ε i = residual item. After controlling for subsidiaries group diversification, company size, company age, group size, and web annual report information disclosure scores, if the empirical results of Model 1 show that α 2 > 0, or α 7 > 0, then H1 or H2 is supported, respectively. That is, the greater the extent of the group s total diversification, the greater the positive impact of the financial group's subsidiary market performance. The higher the company's annual report information score, the greater the positive impact on the financial group's subsidiary market performance. In the same vein, if the empirical results of Model 2 show that β 2 > 0, or β 3 < 0, then H1-1or H1-2 is supported. That is, the greater the extent of the group s related diversification, the greater the positive impact of the financial group's subsidiary market performance. The greater the company's unrelated diversification, the higher the negative impact of the financial group's subsidiary market performance. If β 8 > 0, or β 9 > 0 then H2-1or H2-2 is supported, respectively. That is, the greater the company's financial and operational information disclosure and transparency score, or components of the board of directors and the ownership structure disclosure and transparency score, the greater the positive impact of the financial group's subsidiary market performance. Generally speaking, in comparison to smaller companies, large companies have better operating or market performance, so this study expects that α 3 > 0 and β 4 > 0 (Young, 2008 ; Ou-Yang and Chang, 2009; Ou-Yang and Huang, 2009). For the number of firm years on the performance side, newly established companies may, by technological superiority, have the innovative or entrepreneurial spirit to gain recognition and market share (Greiner 1972; Lyden 1975; Lorange and Nelson 1987). Older companies may by increased productivity, then invest in production equipment in order to improve the production schedule and processes and reduce business operating costs. Taiwanese scholars Young (2008), Ou-Yang and Chang (2009), and Ou-Yang and Huang (2009) found that company age has a significantly negative effect on market performance. Therefore, this study forecasts that the relationship between company age and company market performance is negative (that is, we predict that the directions of α 4 and β 5 are negative). In addition, because increased company-owned cooperative relations leads to greater knowledge-sharing opportunities and then better innovation and performance (Shan, Walker, and Kogut, 1994; Ahuja, 2000; Young, 2008; Ou-Yang and Chang, 2009; and Ou-Yang and Huang, 2009), we expect that the greater the number of companies in the group, the better the companies' performance, that is, α 5 > 0 and β 6 > 0. When companies have better profitability (net operating profit), accounting or market performance is also improved, so we expected that α 6 > 0 and β 7 > 0 (Young, 2008; Ou-Yang and Chang, 2009; and Ou-Yang and Huang, 2009) Sample selection and data sources In this study, we select financial companies listed on the Taiwan Stock Exchange from 2003 to 2007 include in the research sample, and further restrict the sample in accordance with the following selection criteria: (1) as the listed financial group companies must have least two companies in order to explore the diversification strategy effects, non-group owned enterprises or listed companies with less than two subsidiaries are removed; (2) companies without complete stock, financial, and related research data are excluded. Table 1 Summary Table for Samples Selection year Sum Number of listed financial groups The number of listed financial companies Non-group enterprises or listed companies with less than two members of the group Number of financial groups with less than two members of the group Samples use in regression analysis The Business Review, Cambridge * Vol. 16 * Num. 2 * December *

7 In this study, the summarized process of selecting the sample cases is shown in Table 1. From 2003 to 2007, there were a total of 218 financial groups, with 496 subsidiaries, after deleting 130 non-group enterprises or listed groups with less than two subsidiaries, for a total sample size of 88 groups with 366 subsidiaries. The related financial and stock information come from the Taiwan Economic Journal (TEJ) database. The distinction between the group companies is made based on the TEJ properties database, which provides information on groups of attribution. In addition, the Department of the Directorate General of Budget Standard of Industry Classification of industry median classification is used to calculate the company diversification indicators used in product and industrial classifications. For annual report disclosure, content analysis method is applied by using the prospectuses of listed financial companies. 4. EMPIRICAL RESULTS, ANALYSIS, AND DISCUSSION 4.1. Description of the statistical analysis Table 2 shows the descriptive statistics for the research variables. First, the sample companies Tobin s q ranged from 0 to 3.04, with a mean (median) of 1.63 (0.44). The variation between the minimum and maximum is noticeable because the sample size included the financial holding companies and general financial institutions. In our samples, the total diversification indicator (DT) ranged from to , with a mean (median) of (1.5510). Decomposing the total diversification indicator into the related and unrelated diversification indicators, Table 2 shows that the mean of related diversification (DR) is , the median is , the standard deviation is , the minimum value is 0, and the maximum value is ; the mean of unrelated diversification (DU) is , the median is , the standard deviation is , the minimum value is , and the maximum value is The average net sales (SALES) of the sample is about NT billion (about USD $12.96 billion); while the average company age (AGE) is years. On average, financial groups in Taiwan have a longer history but smaller size compared to non- financial companies. Finally, each financial group has an average of about four listed financial companies, and the largest group has 17 listed companies. Profitability- net operating profit (NOP) for the full sample ranged from % to 100% with a mean of 5.80% (lower than non-financial companies mean of 10.39%). Table 2 Descriptive Statistics for the Research Variables Variable name Mean Median Standard Deviation Minimum Maximum Tobin q DT DR DU SALES(NT billion) , , AGE GSIZE NOP(%) DIS_ACCUT DIS_ACCU DIS_ACCU Notes: 1. Sample size: 366 financial firms, 88 groups. 2.Variables definition: Tobin q = Tobin q is company's market performance indicators; DT=Group indicators of the total diversification; DR= Group related Diversification indicators; DU=Group diversification of unrelated indicators; SIZE = SIZE is subsidiaries previous period sales, this study use net sales take natural logarithm -ln (SALES) to measure company size (SIZE); AGE is the number of years for company set up; GSIZE is the number of companies in group; NOP =Company s net operating profit; DIS_ACCU_T = Company's annual report information score (39 to 87 items); DIS_ACCU1= Company's financial and operational information disclosure and transparency score (39 to 67 items); DIS_ACCU2 =Company's components of board of directors and the ownership structure disclosure and transparency score (68 to 87 items); Regarding the annual report information disclosure scores (DIS_ACCUT), the mean score is 19.38, the median is 19, the standard deviation is , the minimum value is 0, and the maximum value is 41. The mean (median) score of financial and operational information disclosure and transparency (DIS_ACCU1) is 11.15(11), the standard deviation is , the minimum value is 0, and the maximum value is 26. The mean (median) score of the components of the board of directors and the ownership structure disclosure and transparency (DIS_ACCU2) is 8.23 (8.00), the standard deviation is , the minimum value is 0, and the maximum value is 18. We can see that, on average, The extent of the annual report information disclosure of Taiwan's listed companies is only achieve 39.55%(19.38/49) of authority requirement, the extent of the financial and operational information disclosure and The Business Review, Cambridge * Vol. 16 * Num. 2 * December *

8 transparency is only achieve 38.45%(11.15/29) of authority requirement, and the extent of the components of the board of directors and ownership structure disclosure and transparency is only achieve 41.15%(8.23/20) of authority requirement. This is consistent with many countries (1), and the differences about annual report information disclosure between the companies are rather high, yet the authorities need to continuously monitor and implement the corporate governance regulations. 4.2 The Results Of The Correlated Analysis Table 3 shows the Pearson product-moment correlation coefficient matrix of the research variables. The relationships between the group total diversification indicator (DT), the related diversification indicator (DR), and the subsidiaries Tobin s q are significant and positive (Pearson correlation coefficient: and 0.092, p-values are less than 0.01). Initially, the support of the group s DT and DR has positive effects on Tobin s q. This result implies that, among the groups, related diversification helps the companies market performance. The relationship between the group's unrelated diversification indicator (DU) and the subsidiaries Tobin s q is insignificant and negative (Pearson correlation coefficient: , p-value>0.1), which implies that, unrelated diversification is detrimental to the performance of the companies. There are significantly negative correlations between company size (SIZE), company age (AGE), number of subsidiaries in group (GSIZE), and subsidiary market performance with Tobin s q (Pearson correlation coefficients were , , and , respectively, all p-values<0.01). The relationship between the group's net operating profit (NOP) and the subsidiaries Tobin s q is insignificant and positive (Pearson correlation coefficient: 0.019, p-value>0.1), which implies that SIZE, AGE, and GSIZE are detrimental to the market performance of the companies. There are significantly positive correlations between annual report information score (DIS_ACCUT), financial and operational information disclosure and transparency (DIS_ACCU1), components of the board of directors and the ownership structure disclosure (DISACCU2) and subsidiary market performance with Tobin s q (Pearson correlation coefficients were 0.126, 0.138, and 0.077, respectively, all p-values<0.01), which means that DIS_ACCUT, DIA_ACCU1, and DIS_ACCU2 are good corporate governance mechanisms, reducing information asymmetry between the company s insiders and related stakeholders and creating higher company performance or value. The company's value creation or performance promotion depends on a proper investment strategy and direction. Finally, both the related diversification indicator (DR) and the unrelated diversification indicator (DU) are significantly correlated with the total diversification indicator (DT; Pearson correlation coefficients: and 0.793, respectively, p-value<0.01). The relationship between DR and DU is also significant (Pearson correlation coefficient: 0.729, p-value<0.01). These results imply that Taiwan's group total diversification, related diversification, and unrelated diversification are very high, but are more oriented toward related diversification. The largest absolute value of the correlation coefficients of the independent variables is (Tobin s q and SIZE), although most of the correlation coefficients reach a significant level. However, the follow-up regression reveals that the collinearity problem is not serious (the independent variables variance inflation factors are all less than three). 4.3 Regression analysis Table 4 shows the regression results for market performance-tobin s q in Models 1 and 2. We can see from Table 4 that each model is significant at a level of 1% with F-values of and and adjusted R 2 values of and 0.237, respectively. This indicates that each model has certain explanatory power. The Durbin-Watson values (DW) are and 1.951, respectively. The results are described below. First, from Model 1, the total diversification indicator (DT) has an insignificantly positive effect on Tobin s q (standardized regression coefficient was 0.063, p-value> 0.10). This result is inconsistent with previous findings in the literature that diversification would reduce the corporate performance. (Wernerfelt and Montgomery, 1988; Young, 2008; Ou-Yang and Chang, 2009). The result is consistent with the expected direction stated in H1, but does not support H1 (group diversification can enhance market performance in the financial group). However, related diversification(dr) and unrelated diversification(du) may have different impacts on company performance (Wade and Gravill 2003; Young, 2008; Ou-Yang and Chang, 2009), so this study further explored the DR and DU results in Model 2. The regression results of Model 2 showed that the effects of group DR and DU on the company's Tobin s q are insignificantly positive and negative, respectively (standardized regression coefficients of and , respectively), This indicates that the group DR enables subsidiaries to enter familiar industries and utilize the existing domain knowledge. DR may be the main factor enhancing corporate performance, whereas unrelated diversification can enable the group s subsidiaries to enter new industries and make it hard to utilize the existing The Business Review, Cambridge * Vol. 16 * Num. 2 * December *

9 domain knowledge, and DU may be the main factor leading the group subsidiaries to low corporate performance (Lin, 2001; Young, 2008; Ou -Yang and Chang, 2009). Tobin q 1 Table 3 Pearson Correlation Coefficient table Tobin q DT DR DU SIZEi ln_agei GSIZEj NOPi (0.002)*** DT DR DU SIZEi (0.058)* ln_agei GSIZEj (0.001)*** (0.002)*** (.099)* NOPi 1 DIS_ACCU_T otal DIS_ACCU _Total (0.046)** (0.084)* (0.007)*** DIS_ACCU1 1 1 DIS_ ACCU (0.004)*** (0.059)* DIS_ACCU2 1 Notes: 1. Samples size contains 366 companies. 2. ***, **, and * denote significance at the 1%, 5%, 10% level, respectively. 3. Variables definition sees Table 2. These results are consistent with the expected direction in H1-1 and H1-2, but p-values are not reach significance, so this study results do not support the H1-1and H1-2 (the greater the extent of the group related (unrelated) diversification, the greater the positive (negative) impact of the financial group's market performance among subsidiaries). Previous studies show that when the company places the focus of diversification on its own business-related industries, which is related diversification, it can better access the diversification benefits for the organization and enhance company performance (Wade and Gravill, 2003; Young, 2008; Ou-Yang and Chang, 2009). Secondly, this study focuses on the effect of annual report disclosure on the financial group subsidiaries market performance. The annual report disclosure variable has an insignificant and positive impact on Tobin s q (standardized regression coefficient of 0.035, p-value> 0.10). This result is consistent with the expected direction in H2, but does not support H2 (annual report information disclosure can enhance market performance in the financial group). This could be because the annual report information disclosure contains two parts, and its components may have different effects on market performance. In addition, this study does not take into account the timeliness of the information revealed, so further observation was made of the financial and operational information disclosure and transparency score (DIS_ACCU1) and components of board of directors and the ownership structure disclosure and transparency (DIS_ACCU2) results in Model 2. The regression results of Model 2 showed that the effects of group DIS_ACCU1 and DIS_ACCU2 on a company's Tobin s q are significantly negative and positive, respectively (standardized regression coefficients of , and 0.247, with p-values <0.10 and <0.05, respectively). The result is inconsistent with the expected direction in H2-1, leading to the rejection of H2-1 (the greater the extent of the group s financial and operational information disclosure and transparency, the greater the positive impact of the financial group's market performance among subsidiaries). It can enable the group s subsidiaries to reveal corporate operational information to rivals and let them to take the appropriate strategy, so financial and operational information disclosure and transparency may be the main factor leading the group subsidiaries to low corporate market performance (Young, 2008; Ou-Yang and Chang, 2009; and Ou-Yang and Huang, 2009). DIS_ ACCU (0.003)*** (0.030)** (0.003)*** )*** The Business Review, Cambridge * Vol. 16 * Num. 2 * December *

10 Table 4, the annual report information disclosure and group diversification strategy impact on market performance index- Tobin q Dependent Variable Tobin q Independent Expected Variable Direction Model 1 VIF Model 2 VIF Intercept? (4.289)*** (4.516)*** DT (0.695) DR (0.626) DU (-0.271) Ln (SIZE) (2.171)** (2.107)** Ln(AGE)? (-3.511)*** (-3.415)*** GSIZE (1.043) (0.343) NOP (-3.096)*** (-3.324)*** DIS_ACCU_T (0.387) DIS_ACCU (1.686)* DIS_ACCU (2.018)** Adj R 2 Model F DW N *** *** Notes: 1. Sample size: 366 financial firms, 88 groups. 2. Apart from the intercept, the coefficient of all variables are standardized coefficient; in parentheses is t value; ***, **, and * denote significance at the 1%, 5%, 10% level, respectively. 3.Variables definition: Tobin q = Tobin q is company's market performance indicators; DT=Group indicators of the total diversification; DR= Group related Diversification indicators; DU=Group diversification of unrelated indicators; SIZE = SIZE is subsidiaries previous period sales, this study use net sales take natural logarithm -ln (SALES) to measure company size (SIZE); AGE is the number of years for company set up; GSIZE is the number of companies of group; NOP =Company s net operating profit; DIS_ACCU_T = Company's annual report information score (39 to 87 items); DIS_ACCU1 = Company's financial and operational information disclosure and transparency score (39 to 67 items); DIS_ACCU2 = Company's components of board of directors and the ownership structure disclosure and transparency score (68 to 87 items); 4. The variance of inflation factor (VIF) are less than 3.585, indicating no serious collinearity problem. 5. DW test showed that autocorrelation problem in residuals. The result is consistent with the expected direction stated in, and supports, H2-2 (the greater the extent of components of board of directors and the ownership structure disclosure and transparency, the greater the positive impact of the financial group's market performance among subsidiaries). This result indicates that the components of board of directors and the ownership structure disclosure and transparency (DIS_ACCU2) enables subsidiaries to receive more specialized monitoring, and this is the main force of corporate governance mechanisms in promoting the financial group subsidiaries market performance (Young, 2008; Ou-Yang and Chang, 2009; Ou-Yang and Huang, 2009). Finally, in regards to the other control variables, group subsidiary size (SIZE) has a significant and positive effect on Tobin s q (standardized regression coefficients of and 0.176, respectively, with p-values< 0.01), indicating that the larger the companies, the better their market performance. The natural logarithm of the group s average company age [Ln (AGE)] has a significantly negative correlation with Tobin s q (standardized regression coefficients are and , respectively, with p- values <0.01), which means that the older the companies, the greater the opportunity they have to enter the industry products maturity period or recession period. The company s potential profits are reduced, lowering its market performance. Group size (GSIZE) has an insignificantly positive relationship with the company Tobin s q (standardized regression coefficients are and 0.090, respectively, with p-values> 0.01), indicating that the greater the number of subsidiaries of the group, the more synergy brought by intra-group companies. Company net operating profit (NOP) and Tobin s q have a significantly negative relationship (standardized regression coefficients are and , respectively, with p-values < 0.01), indicating that a better normal operating profit will have a negative effect on firms market performance. 5. CONCLUSIONS Our study follows the work of Young (2008), Ou-Yang and Chang (2009), and Ou-Yang and Huang (2009). The purpose of this study is to explore the effect of the group diversification strategy and annual report information disclosure on The Business Review, Cambridge * Vol. 16 * Num. 2 * December *

11 financial group market performance. We adopt financial group subsidiaries listed on the Taiwan Stock Exchange and Gre Tai Securities Market from 2003 to 2007 to include in the research sample. The empirical results show that the group's total diversification (DT) has an insignificantly positive effect on the company Tobin s q. These results indicate that the diversification strategy must follow the correct direction, using network links which lead to sharing customer databases and utilizing the existing channel superiority, and making full use of intra-group marketing knowledge. Customers resources improve company performance, leading to positive spillover effects on the financial group among other subsidiaries. However, group related diversification (DR) has an insignificantly positive effect on the company Tobin s q, while group unrelated diversification (DU) has an insignificantly negative effect on the company Tobin s q. This may be because group related diversification enables the group to enter familiar industries and fully utilize the existing customers resources, and then DR may be the main factor leading the group subsidiaries to enhance corporate performance, whereas group unrelated diversification enables a company to entering strange new industries but makes it hard to utilize the existing domain knowledge, and DU may be the main factor leading the group subsidiaries to low corporate performance. Annual report disclosure has an insignificant and positive impact on Tobin s q. This may be because the component of annual report information disclosure contains two parts, and its components may have different effects on market performance. This study does not take into account the timeliness of the information revealed. The effects of group DIS_ACCU1 and DIS_ACCU2 on the company's Tobin s q are significantly negative and positive, respectively. The former result indicates that financial and operational information disclosure and transparency (DIS_ACCU1) enables the group s subsidiaries to reveal corporate operational information to rivals and lets rivals to take the appropriate strategy to resist corporate strategy. The latter result indicates that the components of board of directors and the ownership structure disclosure and transparency (DIS_ACCU2) enable subsidiaries to receive more specialized monitoring, which is the main force of corporate governance mechanisms in promoting the financial group subsidiaries market performance. NOTES: Hossain and Hammami (2009) in Qatar (37%), Leventis and Weetman (2004) in Greece (37%), Al-Shammari (2008) in Kuwait (46%), and Ghazali and Weetman (2006) in Malaysia (31%). REFERENCES Ahuja, G.,2000, Collaboration networks, structural holes, and innovation: A longitudinal study. 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