An evaluation of the Balanced Scorecard® in equity valuation. The case of exchange ratio in the M&As of Taiwan's financial industry
| Date | 01 June 2005 |
| Pages | 206-221 |
| Published date | 01 June 2005 |
| DOI | https://doi.org/10.1108/14691930510592807 |
| Author | Wanncherng Wang |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
An evaluation of the
Balanced Scorecard
w
in equity
valuation
The case of exchange ratio in the M&As of
Taiwan’s financial industry
Wanncherng Wang
National Cheng Kung University, Tainan, Taiwan
Abstract
Purpose – To examine the value relevance of the Balanced Scorecard (BSC) for equity valuation.
Design/methodology/approach – The investigations are based on the empirical relationships
between a set of BSC indicators and the exchange ratios for a sample of 32 mergers and acquisitions
(M&As) of 14 financial holding companies. Data sources are collected from machine-readable
database, annual financial reports, industry reports and professional magazines. The study period
covers years 2000-2002.
Findings – First, the BSC indicators explain as high as 90 percent of the variations of the exchange
ratios. Consistent with the spirit of BSC, non-financial performance measures play an important role in
the valuation of financial institutions, incrementally improving about 40 percent of explanatory power.
Second, empirical evidence shows that acquiring firms outperform the acquired firms and target firms
outperform the non-target firms in terms of BSC measures.
Research limitations/implications – The small sample size and the limited set of the BSC
indicators may constrain the applicability of the results to other industries and time periods.
Practical implications – The empirical results provide a concrete and practical framework for the
valuation of intangibles and the application of the BSC in M&As.
Originality/value – The study examines the BSC as a framework for the valuation of intangibles.
The empirical results support the usefulness of the BSC in equity valuation and further corroborate a
number of extant theories in the M&A literature.
Keywords Balancedscorecard, Finance companies,Acquisitions and mergers,Performance measures,
Equity capital,Taiwan
Paper type Research paper
Introduction
To promote global competitive advantage of domestic banks, the Taiwan Government
enacted the Act of Financial Holding Company (FHC), encouraging financial
institutions to engage in merger and acquisitions (M&As) to enhance their operating
efficiency. The new law opens opportunities for major banks to exploit the potentials of
universal banking and build firewalls between affiliates within the financial groups. In
response to the new law, many Taiwanese banks have engaged in a series of
consolidations of different types of financial institutions (commercial banking, life
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
www.emeraldinsight.com/researchregister www.emeraldinsight.com/1469-1930.htm
The author is particularly thankful to the excellent research assistance of S.R. Wu, the financial
support of the National Science Council (NSC 92-2416-H-006-029) and the seminar participants at
the 2004 AA annual meeting.
JIC
6,2
206
Journal of Intellectual Capital
Vol. 6 No. 2, 2005
pp. 206-221
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691930510592807
insurance, property and casualty, investment banking, securities, etc.). By the end of
year 2002, 12 financial holding companies are established through the exchange of
shares between the acquiring and the target banks.
In the process of a merger, both the acquiring and target firms consider the
characteristics of both firms. Exchange ratios reflect these characteristics and are a
major concern of the shareholders of both sides since it can result in a wealth
redistribution,the potential dilution or growth of earnings per shareof the FHC. How to
reach a fair valuationof the companies in the merger is a fundamentaland difficult issue.
A recent trend in valuation is the increasing emphasis on the intangible, qualitative
and non-financial sides of the companies. Although accounting earnings are still an
important indicator of valuation, more and more empirical evidence suggests that the
returns-earnings relation has declined over decades (Brown et al., 1999; Collins et al.,
1997; Francis and Schipper, 1999). Recognizing relevance lost in the performance
measures of the traditional management accounting, Kaplan and Norton (1996a, b)
developed the theory of the Balanced Scorecard
w
(BSC) as an approach to integrating
financial and non-financial measures into management in the hyper-competitive
environment.
With a sample of 12 FHCs, the study investigates the relation between exchange
ratio and the BSC measures. The primary empirical results are as follows. First, the
regression R
2
s show that the financial perspective of the BSC explains about 50
percent of the variations in the exchange ratio. The inclusion of the other three
non-financial perspectives improves the R
2
to about 90 percent. This empirical result
supports the claim that non-financial aspects are as important as financial perspective.
Consistent with the theories of M&A, the empirical results show that the acquiring
banks are better performers than the acquired banks as measured by the BSC. Finally,
the results also show that small and good performers are more likely to be merger
targets than bad ones.
This study contributes to the literatures in performance evaluation, equity
valuation and merger and acquisition. First, I empirically exploit the potential uses of
the BSC in the area of M&A. Current research on the uses of the BSC mostly focuses on
the aspect of strategic and employee compensation management (e.g. Hoque and
James, 2000; Ittner et al., 2003; Malina and Selto, 2001). This study extends the
literature on the value relevance of non-financial performance variables (e.g, Riley et al.,
2003). Second, this study is also an extension of the M&A literature in that it provides a
potential framework for the determination of an exchange ratio.
The remainder of the study is organized as follows. The next section develops
hypotheses, followed by a discussion of the sample, variables, and models in the
following section. The penultimate section presents and analyzes the empirical results.
The final section presents conclusions and the implications of the study.
Literature review and hypothesis
Over the past 20 years, increased global competition and deregulation have fostered a
wave of consolidations through M&A in the banking industry in many countries. This
wave of mergers has changed the organizational structure and operating environment
of the banking industry. At the same time, this consolidation trend raises an important
question regarding the wealth distribution between the shareholders of the acquiring
and the target banks. A related comment on merger provided by Warren Buffet, the
The BSC in
equity valuation
207
To continue reading
Request your trial