Volume 14, Number 1, June 2019
| The Effects of Income Diversification on Operating Performance and Risk-Taking in Financial Industry: Evidences from China's Financial Reform |
Shu-Ling Lin¹*, Xiao Jin²
Abstract
China implemented the Twelfth Five-Year Plan for the Development and Reform of the Financial Industry in 2011, aiming to enhance the regulatory system and guide the diversification of the financial industry. Given that empirical studies on the effect of income diversification on the operating performance and risk-taking of China's financial industry are still scarce, 22 listed financial institutions of the Chinese A-share market (including 14 banks, 3 insurance companies and 5 securities companies) are the research subjects. The Panel Estimation and Fixed Effect Threshold Model is adopted in this paper to explore the effect of income diversification on the operating performance and risk-taking of China's financial industry from 2008 to 2017, aiming to find out whether the financial industry is affected by the implementation of the Twelfth Five-Year Plan for the Development and Reform of the Financial Industry in 2011. The effects of income diversification on the operating performance and risk-taking of China's financial industry before and after the financial liberalization policy are further compared.
The empirical results show that although China's financial reform policy of the "Twelfth Five-Year Plan for the Development and Reform of the Financial Industry" fails to significantly improve the operating performance of China's financial industry, this policy has reduced the volatility of operating performance of financial institutions, lowered their total risk of bankruptcy and leverage. The verification of the double-threshold model shows that when the degree of financial diversification (DIV) ranges between 0.4479 and 0.4590, the incremental effect of the degree of diversification (DIV) on ROA is the highest, and such incremental effect drops when the degree of financial diversification (DIV) is less than 0.4479, and hits the bottom when the degree of financial diversification (DIV) is greater than 0.4590. Furthermore, when the scale of the Chinese financial industry is less than 16.2150, the incremental effect of size on ROA is the highest, and such incremental effect drops when the size ranges between 16.2150 and 18.8471, and hits the bottom when the size is greater than 18.8471. Finally, the effect of financial liberalization policy (POLICY) on return on assets (ROA) is significantly negatively correlated, indicating that the return on assets (ROA) of the Chinese financial industry will decline after the implementation of the financial liberalization policy.
Keywords: Income diversification, Operating performance, Risk-taking, Financial reform policy.
JEL Classification: M14, M31, N15
¹ Corresponding author and Professor. Department of Information and Finance Management, College of Management, National Taipei University of Technology, Taipei, 10608, Taiwan.* E-mail: shuling@ntut.edu.tw, shulingntut@gmail.com
² Department of Information and Finance Management, College of Management, National Taipei University of Technology, Taipei, 10608, Taiwan. E-mail: 286909363@qq.com