Threshold Effect of Business Climate Indicator on Profitability Persistence

• Main Authors: Meng-Hua Tsai, 蔡孟樺
• Other Authors: Po-Chin Wu
• Format: Others
• Language: en_US
• Published: 2018
• Online Access: http://ndltd.ncl.edu.tw/handle/sk69h5

博士 === 中原大學 === 商學博士學位學程 === 106 === The development of financial institutions can boost economic growth and capital accumulation, which are significantly correlated with national economic development. Corporate profitability reflects the operating results of enterprises, and the persistence of the profitability is beneficial to a company’s sustainable development. This study constructs a panel smooth transition autoregression (PSTAR) model to explore the nonlinear and time-varying threshold effects of the Taiwan Business Monitoring Indicators on return on assets (ROA), return on equity (ROE), and earnings per share (EPS) and their persistence. The empirical estimation is conducted using a panel data of 13 financial holding companies listed on Taiwan stock market between 2008:Q2 and 2017:Q3. The empirical results are summaried as follows: (1)The characteristics of the persistence and stability in ROA, ROE, and EPS are similar, and the persistence varys with the change in the Business Monitoring Indicators. In others words, the persistence and stability of these three profitability changes with each periods Business Monitoring Indicators. (2)The processes of ROA, ROE, and EPS display a smooth transition path. The transition thresholds of the ratios are approximately 32 points when the business light signals change from green to yellow-red, which reveals the robustness of the PSTAR model for estimating the smooth transitions of the three profitability ratios. (3)The persistence and stability of EPS are the highest when the scores of the monitoring indicators are low, followed by those of ROE and then ROA. The results reveal that EPS has the highest stability when the economic climate is comparatively tough. (4)The persistence and stability of EPS are also the highest when the economic climate is comparatively favorable (i.e., when the business light signals are yellow-red and red), followed by those of ROA and then ROE. However, the persistence of EPS is only 0.271, which means that 72.9% of the current EPS is affected by the current exogenous disturbances. The abovementioned results suggest that enterprises should always be alert to the impacts of environmental changes on the three profitability ratios and should increase their persistence and stability when the economic climate is favorable. According to the above empirical results, we propose the following suggestions: (1)Current investors are advised to consider the Business Monitoring Indicators every quarter when estimating the profitability of listed financial holding companies and the persistence and stability of the three profitability ratios. By doing so, investors can accurately evaluate profitability when making investment decisions. (2)Financial regulators and financial holding companies must change monetary policies and asset-and-liability structures to mitigate the disturbances of current random shocks on the current ROA and ROE, thereby increasing the persistence of profitability and maintaining earnings quality. (3)When the Business Monitoring Indicators serve as a transition variable, the persistence and the stability of EPS are primarily higher than those of ROA and ROE. Thus, EPS can be a beneficial fundamental for investors when evaluating the stability of profitability. (4)Although changes in the persistence of ROA, ROE and EPS vary with the Business Monitoring Indicators; current negative external shocks have considerable impacts on the current profitability. Thus, financial regulators and financial holding companies are suggested to reinforce the supervision and management of such companies to prevent financial crises when the persistence of profitability is weakened.