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Asia Pacific Journal of Management

Erschienen in:

01.03.2008

Social capital and cross-selling within financial holding companies in an emerging economy

verfasst von: Cheng-Min Chuang, Chih-Pin Lin

Erschienen in: Asia Pacific Journal of Management | Ausgabe 1/2008

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Abstract

Social capital is the goodwill available to individuals or groups from their network of relationships. It is widely believed that social capital is useful in facilitating and governing hazardous transactions. But how social capital, in the context of a financial holding company (FHC), actually facilitates cross-selling is unknown, especially in an emerging economy. This article maintains that effective cross-selling requires an FHC to first access and accumulate comprehensive and tacit customer-specific knowledge (the “where from” condition) and then share and leverage this knowledge to other applicable business opportunities (the “where to” condition). The role of social capital and embedded ties is found to be critical to this process. Finally, we argue that the major route for the effective cross-selling within an FHC is from the commercial banking division to the underwriting division. Hypotheses are tested on the transactional data collected from Taiwan, and empirical results provide broad support for our arguments.

Vorheriger Artikel The effects of emotional intelligence on job performance and life satisfaction for the research and development scientists in China

Nächster Artikel Organizational values and procedures as antecedents for goal interdependence and collaborative effectiveness

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The core business of commercial banking is taking deposit and lending, and the spread between loan interest rate and deposit interest rate is the main source of their profits, with the (interest rate) spread risk and credit risk as the main sources of risks (Fabozzi & Modigliani, 2003).

The core business of investment banking is, among others, underwriting. Underwriting or public offering is the process that firms or governments issue securities (stocks and bonds) to finance their capital. Underwriters usually advertise the securities, buy the securities from the issuer, and distribute them to the public (Fabozzi & Modigliani, 2003; Pollock, Porac, & Wade, 2004). The bid–ask spread is the main sources of profits and risks faced by underwriters.

Assets management is the business that issuing and managing mutual funds to invest in security market. Investment companies sell shares of mutual funds to the public and invest the proceeds in a diversified portfolio of securities. In Taiwan, the total size of mutual funds is over 60 billion U.S. dollars in 2006.

Universal banking had long been prohibited in the U.S. and Japan. In the U.S., the Glass–Steagall Act of 1933 banned commercial banks from underwriting corporate securities for the conviction that universal banking operations were potentially connected to the Great Depression of 1929 (Benston, 1996). Similar provision was also appeared in Japan in the Security and Exchange Act since 1948 (Hoshi, 1996). After debate for decades, however, the Glass–Steagall Act was eventually terminated in 1999, when the Financial Service Modernization (Gramm–Leach–Bliley) Act was signed into law in the U.S. The FHC Act in Taiwan followed in 2001. The FHC Act was also enacted in Japan in 1997.

Kroszner and Rajan (1997) argues that the holding company structure is a better governance form due to the built-in firewalls between divisions against the possible conflicts of interest.

One of the major purposes for the Taiwanese government to draw up the FHC Act, like that of many other financial deregulations in Taiwan (Chung, 2006), was to enhance competitive advantages of financial industries in Taiwan. It is expected that the competitive advantages come from the synergies arising from integrating financial institutions within an FHC that overcomes the information asymmetry problems in financial markets (Article 1 of the FHC Act, 2001; Rajan, 1996), although the empirical evidence is still not clear.

How effective this “internal capital market” will replace external capital market depends at least partly on the development of the economy. Khanna and Palepu (2000) find that firms associated with a business group led to a significantly better performance at earlier stages of economy development than at the later stages. Peng et al. (2005) also maintain that the optimal scope of the firm is likely to contract in the long run. They argue that the capital markets are more inefficient at earlier stages and internalizing capital market within conglomerates can save costs. Accompanied with the development of economy, the external capital market conditions improved, and the advantages of employing internal capital markets may disappear gradually.

Past studies suggest that frequency of transactions is an adequate measurement for embeddedness (Chung, Singh, & Lee, 2000; Curral & Inkpen, 2002; Gulati, 1995; Gulati & Gargiulo, 1999; Pollock et al., 2004).

A main bank is a commercial bank which maintains strong tie with a certain customer. A main bank is defined as a commercial bank which loans to a certain customer and the amount of the loans is above 30% of the total loans the customer borrowed. Sensitivity analysis was performed when using various cutoff ratios as 20, 30, or 40%, the results are all similar. By this operating definition, a customer may have two main banks or more.

Indeed, our data are not time-series cross-section (panel) but just cross-sectional. Although we collected the transaction data from 1998 to 2004, the data from 1998 to 2002 were only considered as explanatory variables and not included in dependent variables for two reasons. First, not all FHCs were established during this period. The last FHC (First) was established on January 2, 2003 (see Table 1). Second, we need the frequency of the transactions during past 5 years as explanatory variables. Therefore, only the transactions after the fifth year (2003 and 2004) can be counted as dependent variables (Jensen, 2003; Gulati, 1995). The transactions in 2003 and 2004 were combined to avoid the problem that realized underwriting dyads in each year were too few. Thus, our data are only cross-sectional.

Heteroscedasticity is quite a common problem in panel data. The variance of a normally distributed dependent variable may vary with groups. In the logistic regression model, where the dependent variable is Bernoulli distributed, the variance is determined only by the probability, which can be estimated by maximum-likelihood method. When y is binary and complies with Bernoulli distribution, the variance of y is \( \sigma ^{2} = V{\left( y \right)} = P{\left( {1 - P} \right)} \) and determined only by P. P is the probability that y = 1 and \( P = 1 \mathord{\left/ {\vphantom {1 {{\left( {1 + e^{{ - x\beta }} } \right)}}}} \right. \kern-\nulldelimiterspace} {{\left( {1 + e^{{ - x\beta }} } \right)}} \) in logistic model. As the x varies, P and thus \( \sigma ^{2} \) vary as well. That seems to be the problem of heteroscedasticity. Because the structure of variance is clear, using the maximum-likelihood method to estimate β and thus P and \( \sigma ^{2} \) simultaneously can solve this problem. Therefore, we employ the maximum-likelihood method to estimateβ.

Alan Greenspan, the chairman of Federal Reserve Board in the U.S. during 1987–2006, also expressed his worry about the impending obsolescence of banks: “Public policy should be concerned with the decline in the importance of banking...The issues are too important for the future growth of our economy and the welfare of our citizens.”

Indeed, the first merger approved under the Gramm–Leach–Bliley Act was the acquisition by a security firm, Charles Schwab, of a commercial bank, U.S. Trust Corp.

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Titel: Social capital and cross-selling within financial holding companies in an emerging economy
verfasst von: Cheng-Min Chuang
Chih-Pin Lin
Publikationsdatum: 01.03.2008
Verlag: Springer US
Erschienen in: Asia Pacific Journal of Management / Ausgabe 1/2008
Print ISSN: 0217-4561
Elektronische ISSN: 1572-9958
DOI: https://doi.org/10.1007/s10490-007-9056-1

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