Review of Pacific Basin Financial Markets and Policies

Two competing hypotheses regarding market structure and the performance of firms are the traditional "structure-conduct-performance" (SCP) hypothesis, in which high concentration lowers the cost of collusion and earns monopoly rents, and the "efficiency" hypothesis, which emphasizes the operating efficiency of particular firms. In this paper, we present the results from testing both the hypotheses in the context of Taiwan's banking market. Our goal is to understand the effect of the 1991 liberalization policy by examining whether market structure and firm performance in this industry differ in the periods before and after the 1991 revisions to the Banking Act. Prior to the 1991 revisions, our results do not support either the SCP or the efficiency hypothesis for Taiwan's banking industry. The industry's market structure seems to exhibit a kind of "quiet-life" competing environment. The results for the period after the 1991 revisions tend to support the competing efficiency hypothesis. Our findings suggest that the 1991 revisions to the Banking Act have stimulated competition and brought about an emphasis on efficiency in Taiwan's banking industry.

This paper attempts to explain why Taiwan was able to cope with the East Asian financial crisis more successfully than other economies in East Asia. It pinpoints Taiwan's competitive industrial sector as the most likely relevant underlying factor. It also shows that while sound macroeconomic policy and prudent financial policy all contributed to allowing Taiwan to avert the crisis, an effective industrial policy that fostered industrial restructuring, strengthened industrial competitiveness, as well as helped to restore macroeconomic equilibrium, was the most instrumental factor.

Price clustering in financial markets has been identified by previous studies. However, few studies have examined the phenomenon in the futures market. This paper presents price clustering for the Nikkei 225 stock index futures contract on the SIMEX. An extremely low percentage of odd-tick trades appears at the opening for the first trading session, while moderately low percentage occurs at the opening and the closing for the second trading session. GARCH estimation results document that the degree of price clustering increases in the periods with high volatility, bid-ask spreads, and transaction frequency. Price clustering tends to occur on the last trading day which the futures contract is to be presented. Generally, the results support the negotiation hypothesis of price clustering proposed by Harris (1991).

Financial economists have devoted substantial effort to describing and analyzing the governance structures of the Japanese keiretsu, or business groups, to explain how their features serve to improve group performance. The governance mechanisms described provide an informative contrast to the market based monitoring mechanisms of the Anglo-American governance system. In this paper we compare the performance of Japanese keiretsu member firms with that of independent Japanese firms, whose governance structure is more market based. We also compare the performance of different types of keiretsu group members. Two results emerge. First, we find no support for the hypothesis that the overall set of governance structures of keiretsu firms are more effective at maximizing shareholder wealth than are those of independents. In addition, we document significant performance differences among different types of group member firms.

This paper is divided into three parts as follows. The first part explains why Taiwan was relatively unscathed by the Asian Financial Crisis, including the short term countermeasures that were taken. The second part examines the role of short-term capital flows in the emerging market economy, and the third part concludes the paper.