Dar-Yeh Hwang Department of Finance, College of Business, National Taiwan University, Taipei Taiwan. Chi-Chun Liu Department of Accounting, College of Management, National Taiwan University, Taipei, Taiwan. Lishu Ouyang Department of Economics, College of Management, Chinese Culture University, Taipei, Taiwan. Balanced Performance Index and Its Implications : Evidence from Taiwan’s Commercial Banks

Table of Contents Introduction Performance Measures Methodology Constructing Performance Index Hypotheses Testing The Data The Empirical Results The Performances of Individual Banks The Performances of Banks of Different Types Prediction of Future Performances Simultaneous Equations ： Regression Results Summary Conclusions

Introduction  Performance Measure 1.Plays a critical role in evaluating the achievement of firms’ goals, compensating managers, and developing strategies. 2.Should include outcome measures, the performance drivers of those outcomes, short-term and long-term objectives, hard objective measures and more subjective measures.  After 1991, highly competitive banking industry 1.lower profitability for most banks. 2.the most dominant variable in bank managers’ decisions - how to maximize the shareholders’ value.

Performance Measures  Prior Performance Measures  Value creation index  IC-index  Economic value added  Balanced Scorecard  Efficiency– data envelopment analysis (DEA)  Efficiency – stochastic frontier approach (SFA)  Balanced Performance Measures  Concerning financial and non-financial aspects.  Offering a balanced picture of current operating performance as well as the drivers of future performance.

Methodology - Constructing Balanced Performance Index  Financial Performance Index Capital Structure and Solvency/Management/Profitability/Scale/Growth  Non-financial Performance Index Customer Services /Technology/CEO Leadership Questionnaires using five-point Likert scale  Performance Measures and Weights Standardization/ relative impacts  The Composite Index of Total Performance Index Finance : Non-finance = 2 : 1  Performances of Banks of different types Old vs New and Private vs Privatized government-owned

Methodology – Hypotheses Testing  Hypothesis 1: Old (privatized government-owned) banks perform better than new (private) banks.  Hypothesis 2: The current performance indexes can be used to predict future performance.  Hypothesis 3: Other financial and non-financial factors affect profitability, management and customer services performance indexes.

The Data  Financial Data  Panel data of 35 sampled publicly-traded commercial banks in Taiwan for the years of 2000 and 2001  Collected mainly from  ROC Securities and Futures Institute Database  Annual Report of Sampled Banks  Non-financial Data  CEO Leadership - surveys based upon peers rating  Customer services and Technology - customers surveys

The Empirical Results – Performances of Individual Banks

The Empirical Results – Financial Performances of Banks of Different Types

The Empirical Results – Non-financial Performances of Banks of Different Types

The Empirical Results – Spearman’s Rank Correlation Coefficients

The Empirical Results – Prediction of Future Total Performances

The Empirical Results – Simultaneous Equations ： Regression Results Figure 1.Impacts of Financial and Non-Financial Factors on Management, Profitability and Customer Services

 Privatized government-owned banks performed relatively well than private banks in terms of financial performance.  New banks perform better than old banks in customer services in  Privatized government-owned banks performed better than private banks in CEO leadership in  Current performances, financial and non-financial, have positive impacts on future performances.  Management, profitability and customer services are interrelated. The Empirical Results – Summary

Conclusions  Major contribution : the consideration of both financial and non-financial factors in measuring performances of banks.  Non-financial performance measure is highly value- relevant for banks.  The performance measure can be interpreted as “leading” indicators of future performance.  Consistent with the literature, predictive ability is one of the primary benefits of non-financial measures.