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The impact of
fair-value-accounting on the
relevance of capital adequacy
ratios

Impact of fairvalue-accounting

Evidence from Taiwan

Received 3 April 2012

Revised 3 June 2012
19 August 2012
Accepted 30 October 2012

Yi-Ping Liao

133

Department of Accounting, Ming Chuan University, Taipei, Taiwan

Abstract
Purpose This study aims to empirically investigate whether the adoption of fair-value-accounting
decreases the relevance of banks capital adequacy ratios (CARs) in explaining insolvency risks.
Additionally, how the disclosure quality affects the superiority of fair-value-based CARs over
cost-based CARs is also explored.
Design/methodology/approach Using data from Taiwan banks from 2004 to 2010, the following
tests are conducted. First, the insolvency risk is regressed on the reported CAR, along with the related
interaction with the adoption of TFAS No. 34 to test the weakened relevance of CARs during the
post-TFAS No. 34 periods. Second, the relative relevance of fair-value-based CARs and cost-based
CARs is assessed using Vuongs Z-statistic. Lastly, observations are partitioned into two groups
banks of higher and lower disclosure quality to investigate whether fair-value-based CARs is
superior (inferior) to cost-based CARs for banks with higher (lower) disclosure quality.
Findings First, adopting TFAS No. 34 reduces the relevance of CARs in explaining banks
insolvency risks. Second, fair-value-based CARs are superior to cost-based ones in relation to
insolvency risks only for banks of higher disclosure quality.
Originality/value This study is the first to fill the empirical gap by demonstrating that the ability
of CARs to explain the insolvency risk is adversely influenced by the adoption of fair value accounting.
In particular, the results shed some light on the move toward fair-value accounting, and may be
interpreted that adopting fair-value reporting is not flawless, drawing attention to the potential
information loss in abandoning historical-cost-based regimes. Moreover, because the application of
fair-value accounting in the Taiwan banking industry is fairly similar to that of international or US
GAAP, these results also yield insights into other standard-setters.
Keywords Capital adequacy ratio, Fair value accounting, TFAS No.34, Insolvency risk, Bank regulation,
Banking, Taiwan
Paper type Research paper

1. Introduction
For two decades, the capital adequacy ratio (CAR) requirement has been one of the
primary regulatory mechanisms used to monitor banks[1]. Presently, most regulators
around the world follow the Basel Accord, under which CARs are calculated by dividing
a firms regulatory capital (Tier 1, Tier 2, and Tier 3) by the firms risk-weighted assets
(RWAs). However, many banking practitioners and researchers have argued that CARs
now have less relevance due to the change from the historical-cost-based accounting
JEL classification G21, G28, M41

Managerial Finance
Vol. 39 No. 2, 2013
pp. 133-154
q Emerald Group Publishing Limited
0307-4358
DOI 10.1108/03074351311293990

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regime to the fair-value-based system (Anagnostopoulos and Buckland, 2005).

Specifically, under the former system, balance sheet items were based on the book
values of assets and liabilities, while under the latter regime a great portion of financial
assets and liabilities (and hence, the regulatory capital) are determined on a
marked-to-market basis. As a result, the introduction of fair-value reporting may cause
increased unnecessary volatility of earnings and thus lead to the decreased relevance
of CARs[2] (Chisnall, 2000; Allen and Carletti, 2008; Heaton et al., 2010). However,
previous studies provide only theoretical or narrative conjunctures in this regard.
Accordingly, this study seeks to address the empirical gap by exploring the influence of
fair-value reporting on the relevance of CARs. In particular, the use of CARs originates
from the regulators need to monitor a banks financial strength; hence, this study
focuses on the impact of fair-value reporting on the ability of CARs to explain the
insolvency risk.
In the context of Taiwan, adopting Taiwan Financial Accounting Standards
(TFAS) No. 34 serves as the milestone in applying fair-value-based measurements to
formal accounting guidance. Under TFAS No. 34[3], financial assets and liabilities are
classified as trading, available-for-sale, or held-to-maturity, with items in the former
two categories being re-valued at fair values at each reporting date. Changes in fair
values for trading (or available-for-sale) assets or liabilities are recognized in net
incomes (other comprehensive incomes that are a component of equity), and are,
therefore, included in calculating the regulatory capital. Using data from Taiwan
banks from 2004 to 2010, three research questions are explored:
RQ1. Whether reported CARs become less relevant in explaining the insolvency
risk[4] in the post-TFAS No. 34 periods?
RQ2. Whether fair-value-based CARs outperform cost-based CARs in summarizing
information about the insolvency risk?
RQ3. Whether disclosure quality influences the relative relevance of
fair-value-based CARs as opposed to cost-based CARs in explaining the
insolvency risk.
To achieve these research goals, first, the insolvency risk is regressed on the reported
total (or Tier 1) CARs[5], along with related interactions with the adoption of TFAS
No. 34 to test the weakened relevance of CARs during the post-TFAS No. 34 periods.
Second, using banks disclosures about valuation-adjustment accounts for trading
(or available-for-sale) securities, the relative relevance of as-if cost-based Tier 1 CARs
(or as-if full-fair-value-based total CARs) versus reported Tier 1 CARs (or reported total
CARs) in explaining insolvency risks is assessed by applying Vuongs Z-statistic.
Lastly, observations are partitioned into two groups banks of higher and lower
disclosure quality, which is measured by a unique disclosure ranking in Taiwan (i.e. the
Information Transparency and Disclosure Ranking System (ITDRS)). Fair-value-based
CARs are expected to be superior (inferior) to cost-based CARs for banks with higher
(lower) disclosure quality. The empirical results provide strong evidence supporting
these predictions.
Using Taiwan data offers two major advantages. First, to investigate the influence of
adopting fair-value reporting on the relevance of CARs, disclosures about CARs should
be extensively available in the periods before and after fair-value-based accounting

guidance is adopted. In the US context, this relates to 1994 and 1998, when FAS 119 and
FAS 133, respectively, were announced. However, the preliminary inspection of US
banks 10-K filings indicates that some banks still did not provide details about CARs
before 2000. In contrast, banks in Taiwan have been required to file CARs with the
authority since 1993 when Basel I was implemented in Taiwan. Hence, detailed data on
CARs is readily available before and after TFAS No. 34 was adopted when the first
application of fair-value reporting took place in Taiwan. Second, to explore whether the
superiority of fair-value-based CARs over cost-based CARs is affected by the disclosure
quality, feasible proxies are necessary. Although prior studies have applied their own
proxies, choosing any of them while neglecting others seems to be arbitrary. In contrast,
in the context of Taiwan research, the ITDRS has become the only widely accepted
proxy for disclosure quality because it is provided under the requirements and
monitoring of the Securities and Futures Bureau.
This study provides contributions in two ways. First, despite the growing prevalence
of fair-value reporting, the potential impact on the regulatory mechanism appears to be
ignored in the accounting literature. Although finance studies theoretically predict the
decreased usefulness of CARs due to the inclusion of fair-value estimates, this study is
the first to fill the empirical gap by demonstrating that the ability of CARs to explain the
insolvency risk is adversely influenced by the adoption of TFAS No. 34. In particular,
the results shed some light on the move toward fair-value accounting, and may be
interpreted that adopting fair-value reporting is not flawless, drawing attention to the
potential information loss in abandoning historical-cost-based regimes. Moreover,
because the application of fair-value accounting in the Taiwan banking industry is fairly
similar[6] to that of international or US GAAP, and using Taiwan data also offers
empirical advantages (as mentioned in the previous paragraph), these results also yield
insights into other standard-setters. Second, a clear policy implication is related to the
urgent need to seek feasible measures for mitigating possible negative effects. More
specifically, since as-if cost-based CARs convey superior information at least under
some circumstances, requiring the explicit disclosure of cost-based CARs may aid users
in assessing banks insolvency risks. Additionally, users should evaluate banks
disclosure quality before basing economic decisions on fair-value-based CARs.
Regulators and standard-setters should make more effort to enhance the reporting
quality if a full, fair-value application is still the eventual goal for the near future.
2. Literature reviews and hypothesis development
2.1 Capital adequacy regulations in the banking industry
Risk management is crucial to the banking industry. Since the Basel Accord was
introduced, the minimum CAR requirement has become a major regulatory tool in
various jurisdictions. By definition, a CAR is the ratio of a banks total regulatory
capital divided by the total amount of RWAs. Regulatory capital consists of three types
of capital Tier 1[7], Tier 2, and Tier 3[8] while RWAs refer to a banks assets
weighted according to credit, interest, and operational risk. Previous studies on CARs
mainly center on the influence of the capital requirement on the riskiness of banks. For
instance, Shrieves and Dahl (1992) shows that, for banks that were undercapitalized
according to regulatory standards, the minimum capital regulation was at least
partially effective in forcing banks to increase their capital or to decrease risks. Konishi
and Yasudab (2004) finds that implementing the capital adequacy requirement reduced

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risk taking in Japanese commercial banks; the authors also found that a banks capital
was negatively related to risk taking[9].
Recently, in 2009 in the aftermath of the financial crisis, the Basel Committee on
Banking Supervision (BCBS) proposed major revisions and additions to the existing
Basel II capital adequacy regime. The resultant proposed framework is termed
Basel III, and the G20 endorsed the new Basel III capital and liquidity requirements
at the November 2010 Summit in Seoul. In detail, several important amendments were
endorsed. First, banks are required to hold 4.5 percent of common equity (up from
2 percent in Basel II) and 6 percent of Tier 1 capital (up from 4 percent in Basel II) as
RWAs, while Tier 3 capital will be phased out completely. Second, Basel III introduces
additional capital buffers:
.
a mandatory capital conservation buffer of 2.5 percent; and
.
a discretionary counter cyclical buffer, which allows national regulators to
require up to another 2.5 percent of capital during periods of high credit growth.
Third, a minimum 3 percent leverage ratio and two required liquidity ratios were
introduced. The liquidity coverage ratio requires a bank to hold sufficient high-quality
liquid assets to cover its total net cash outflows over 30 days; the net stable funding
ratio requires the available amount of stable funding to exceed the required amount of
stable funding over a one-year period of extended stress. Overall, the new requirements
under Basel III seek to improve the quality of the capital, increase risk weightings for
derivatives and repos, introduce a leverage ratio, and address pro-cyclicality.
Therefore, Basel III is expected to have a major impact on the financial institutions,
such as:
.
weaker banks being crowded out;
.
significant pressure on banks profitability;
.
changes in demand from short-term to long-term funding;
.
reduced risk of a systematic banking crisis; and
.
a decrease in lending capacity (Shearman and Sterling, 2011; KPMG, 2012).
2.2 Fair-value accounting and its influence on regulatory measures
In the past, accounting systems featured the historical-cost concept, under which assets
and liabilities were recognized at cost and were not subject to revaluation until disposal.
However, in the 1980s, when numerous financial scandals became known, many blamed
historical-cost accounting for not being able to report potential losses from innovative
financial instruments in a timely manner. In response, the fair-value-based approach
was advocated and gained widespread acceptance. Eventually, following several
significant pronouncements on fair-value reporting (e.g. SFAS No. 107[10] and SFAS
133[11]), the Financial Accounting Standards Board (FASB, 2000, p. 8) has stated that its
long-term goal is to have all financial assets and liabilities recognized at fair values.
Numerous studies have examined the value relevance of accounting data based on fair
values compared to data based on historical costs. For instance, Barth (1994) shows that
disclosed fair-value estimates of banks investment securities and securities gains or
losses based on those estimates are reflected in share prices. Carroll et al. (2003)
documents a significant association between stock prices (returns) and the fair value of
investment securities (fair-value securities gains and losses), after controlling for

historical costs. Similarly, in the Taiwan context, Wang and Chen (2010) finds that the
value relevance of financial instruments has been enhanced after TFAS No. 34 was
adopted. Li (2010) indicates that recognizing and measuring non-derivative financial
assets and liabilities using fair-value measurements significantly improves the value
relevance and predictability of earnings.
Despite the well-documented evidence supporting that fair-value reporting facilitates
firm valuation, few studies have investigated the related consequences from a
regulatory standpoint. Considering the critical role of regulation in bank operations, the
potential impact of shifting to fair-value-based reporting as a regulatory mechanism
should be addressed. In particular, it has been argued that continuous
marking-to-market treatment can greatly affect the stability of banks earnings and
equities. Chisnall (2000) indicates that the overwhelming majority of banking
practitioners believe that the volatility in reported earnings under fair-value
applications bears no relationship to the fundamentals of the business objective of
transactions entered into in the banking books. Anagnostopoulos and Buckland (2005)
argued that most fair-value changes, while not yet realized, are fundamentally transitory
and would potentially have distorting effects on CARs. Likewise, Bakoro et al. (2010)
posit that recognizing these unrealized gains and losses would affect the quality of
capital. Shaffer (2011) indicates that implementing fair-value accounting more broadly
might not necessarily lead to more useful reporting[12]. Briefly, practitioners strongly
suggest that the move to fair-value-based CARs will be followed by decreased
information usefulness. Because CARs are used to monitor banks health, severe
regulatory concerns may arise if the relevance of CARs in explaining banks insolvency
risks weakens due to fair-value reporting. Then, two empirical predictions based on this
conjuncture are testable. First, from the time-series aspect, since TFAS No. 34 initiates
the fair-value application in Taiwan, the reduced relevance of CARs in explaining
insolvency risks would be evident only during the post-TFAS No. 34 periods. Second,
from a cross-sectional perspective, during the post-TFAS No. 34 periods when
fair-value- and cost-based CARs are available (or can be reasonably estimated),
comparing the relative relevance is essential[13]. For instance, Barth et al. (1995)[14] and
Khurana and Kim (2003)[15] applies this concept. In this study, the reported total CARs
(or Tier 1 CARs) will be converted into as-if CARs to compare their relative relevance in
explaining the insolvency risk, using details about fair-value changes from the financial
assets and liabilities[16]. The following arguments are proposed:
H1(a). The relevance of total CAR (or Tier 1 CAR[17]) in explaining the insolvency
risk is adversely affected by the adoption of TFAS No. 34.
H1(b). The more fair value oriented the total CAR (or Tier 1 CAR), the lower its
ability to explain the insolvency risk.
If fair-value-based regulatory metrics are less relevant, the need for measures for
mitigating adverse effects emerges. In particular, the inability of fair-value-based
metrics to be more useful may result from the complexity and subjectivity involved in
deriving fair-value estimates (Nissim, 2003; Landsman, 2006; Aboody et al., 2006;
Bartov et al., 2007; Penman, 2007). Correspondingly, Khurana and Kim (2003), using
the fair-value disclosures of US holding companies, shows that market-based metrics
are less value relevant when objective market-determined fair-value measures are not
available. The results indicate that historical cost is more informative for a subset of

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bank holding companies whose reporting transparency is lower due to the lack of
appropriate estimation methods or guidance for non-publicly-traded financial
instruments. In this light, banks willing to disclose more about the methodologies
used in deriving fair-value-based metrics can provide CARs that are more relevant. In
sum, the following hypothesis is proposed:

138

H2. The relative superiority of fair-value-based total CAR (or Tier 1 CAR) over
cost-based total CAR (or Tier 1 CAR) is positively related to banks disclosure
quality.
3. Research design
3.1 Data and sample description
The sample comprises annual data from Taiwan banks that were publicly traded
between 2004 and 2010. This sample period is chosen for two reasons. First, data from
pre- and post-periods of TFAS No. 34 are necessary for empirical testing, and because
2006 is the year of adoption, observations from before and after 2006 are included.
Second, the preliminary inspection indicates that most Taiwan banks began to provide
details about CARs in 2004. Hence, the period 2004-2010 is chosen to keep the sample size
as large as possible[18]. Financial data, CARs, and details about valuation adjustments
for trading and available-for-sale securities which are necessary in converting
reported CARs into as-if ones were directly collected from the banks quarterly and
annual filings. Additionally, data on information transparency and disclosure rankings
was collected from the official web site of the Securities and Futures Institute.
After observations with missing data and those at the top and bottom 0.05 percent of the
observations were deleted, the final sample consisted of 27 banks and bank-year
observations ranging from 132 to 185.
3.2 Variable definitions and regression analyses
This study aims to explore the impact of adopting fair-value accounting on the
usefulness of CARs. From a regulatory standpoint, the CAR is used to monitor banks
health; therefore, the CARs association with insolvency risks best proxies for its
usefulness. Consistent with previous studies that examine banks insolvency risks
(McAllister and McManus, 1992; Lin et al., 2005; Lepetit et al., 2008; Huang et al., 2009),
the following regression is conducted to test H1(a):
IRi a1 a2 MCARi a3 MCARi ADP i a4 ADP i a5 LOGTAi a6 LEV i ei

where MCARi MOCARi for Tier 1 CARs, and MTCARi for total CARs.
IR standard deviation (ROA)/[mean(ROA) mean(equity ratio)], which is
measured using the four quarters of data in a specific year.
IR captures the annual mean likelihood of bank i becoming insolvent, and higher
values of IR imply greater insolvency risks. MOCARi (MTCARi) is the annual mean
value for bank is reported Tier 1 (total) CARs measured using the four quarters of data
in a specific year. ADP is equal to 1 if the observation is after TFAS No. 34 was adopted,
namely, 2006, and 0 otherwise, consistent with prior studies in which the effects of
adopting specific accounting or regulatory guidelines are investigated (Cooper et al.,
1991; Hsieh and Wu, 2006). Specifically, ADP interacts with both measures of MCAR
(e.g. MOCAR and MTCAR) to assess how ADP influences the IR-CARs association.

Therefore, a2 is expected to be negative and a3 to be positive, indicating that higher

CARs are related to lower insolvency risks while adopting TFAS No. 34 reduces the
IR-CARs relationship. In addition, previous studies suggest that size and leverage also
affect banks insolvency risks (Lin et al., 2005; Biddle et al., 2011; Wolff and
Papanikolaou, 2011), so LOGTA and LEV are included as control variables. The former
is defined as the natural logarithm of annual mean total assets, while the latter refers to
the annual mean debt-to-asset ratios; both use the four quarters of data in a specific year.
To test H1(b), converting the reported CARs into as-if ones is achieved by using
details about fair-value changes in financial assets and liabilities. Specifically, Taiwans
regulatory guidance requires changes in fair values for trading securities to be included
in Tier 1 capital. In other words, reported Tier 1 CARs are effectively fair-value-based,
and can be converted into cost-based capital by deducting the fair-value change for
trading securities from reported Tier 1 capital values. Then, as-if cost-based Tier 1 CARs
can be re-calculated by dividing as-if cost-based Tier 1 capital by the RWAs.
Additionally, under regulatory guidance, only 45 percent of the changes in fair values for
available-for-sale securities are included in Tier 2 capital, so the reported total CARs are
essentially partially marked-to-market. Then, as-if full-fair-value-based total capital
can be derived by adding the remaining 55 percent of the fair-value change for
available-for-sale securities to the reported total capital. Similarly,
as-if full-fair-value-based total CARs can be re-calculated to be the ratio of as-if
full-fair-value-based total capital to RWAs. A detailed explanation for deriving as-if
Tier 1 and total CARs is presented in Appendix 1. In short, regressions (2.1)-(2.4) are
conducted to test H1(b):
IRi a1 a2 MHCARi a3 LOGTAi a4 LEV i a5 D_YR ei

2:1

IRi a1 a2 MOCARi a3 LOGTAi a4 LEV i a3 D_YR ei

2:2

IRi a1 a2 MFCARi a3 LOGTAi a4 LEV i a3 D_YR ei

2:3

IRi a1 a2 MTCARi a3 LOGTAi a4 LEV i a3 D_YR ei

2:4

Specifically, regressions (2.1) and (2.2), in which MHCAR (the mean of bank is as-if
cost-based Tier 1 CARs) and MOCAR (the mean of bank is reported Tier 1 CARs)[19] are
used to explain IR, are performed. Following Khurana and Kim (2003) and Dechow
(1994), Vuongs Z-statistic is applied to assess the statistical significance of the difference
in the regressions ability to account for the variation in IR. Similarly, regressions (2.3)
and (2.4) are implemented, while MFCAR (as-if full-fair-value-based CARs) and MTCAR
(reported total CARs) are applied to explain IR. In addition, consistent with Lin et al.
(2005) and Lepetit et al. (2008), year dummy variables, D_YR, along with LOGTA and
LEV, are included to control for potential effects.
Dechow (1994) indicates that a positive and significant Vuongs Z-statistic implies
that the residuals produced by the base regression are larger in magnitude than those
from the alternative regression. Thus, the base model is inferior to the alternative one
in explaining the dependent variable. H1(b) posits that the more fair-value oriented the
total (or Tier 1) CAR, the lower its ability to explain insolvency risks, so Vuongs
Z-statistic is expected to be negative when comparing regressions (2.1) and (2.2), but
positive when comparing regressions (2.3) and (2.4).

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140

H2 relates to the influence of disclosure quality on the superiority of

fair-value-based CARs over cost-based ones in explaining insolvency risks. Hence,
observations are partitioned into two groups according to their relative rankings in
providing comprehensive disclosures. In the Taiwan context, the ITDRS ranking[20]
has been extensively used to proxy for the disclosure quality (Huang et al., 2005;
Lin et al., 2007; Wang and Chang, 2008; Chi, 2009). The ITDRS ranking has been
recognized as the most suitable proxy for Taiwan firms disclosure quality because:
.
the ITDRS ranking is rated under the requirements and monitoring of the
Securities and Futures Bureau; and
.
all public firms are included except for those in financial distress.
As shown in Table I, the original score obtained from the ITDRS is labeled with a letter
grade ranging from A to B. Hence, a numerical value of 2, 1, and 0, is assigned to
A , A, and B[21], respectively. In addition, consistent with Brown and Hillegeist
(2007) and Shaw (2001)[22], MDi is defined as the median ranking of sample banks in a
given year, and GPi is equal to 1 if bank is numerical ranking is above MDi and 0
otherwise. Eventually, partition observations based on GPi and re-running regressions
(2.1)-(2.4) lead to obtaining the associated Vuong Z-statistics. For observations with GPi
equal to 1, it is expected that regression (2.2) outperforms (2.1) while regression (2.3)
outperforms (2.4). In contrast, for observations with GPi equal to 0, regression (2.1)
would outperform (2.2) while regression (2.4) would outperform (2.3).
4. Empirical findings
4.1 Empirical results and analyses
Table II, Panel A, presents descriptive statistics for original financial data for all
observations. The median TA (total assets) and LIB (total liabilities) are 470,000 and
443,000 million NTD (New Taiwan Dollars), respectively; the median TCAR (reported
total CAR) and OCAR (reported Tier 1 CAR) are 10.95 and 8.43 percent, respectively.
Panel B displays the descriptive statistics for the variables used in the regressions. The
median IR (insolvency risk) and MTCAR (mean of banks reported total CARs) are
7.75 and 10.97 percent, respectively, suggesting that banks during the sample periods
have a limited probability of becoming insolvent. Table III, Panel A, provides the
Pearson correlations among variables in regression (1). The dependent variable, IR, is
negatively correlated with MTCAR and MOCAR while ADP (the adoption of TFAS
No. 34) is positively related to both reported CARs. Table III, Panel B, presents the
correlations among variables in regressions (2.1)-(2.4). IR is negatively related
to MTCAR, MFCAR, MOCAR, and MHCAR with coefficients ranging from

Table I.
Distributions of original
scores from the ITDRS

2006
2007
2008
2009
2010
Total

Total

6
1
1
1
1
10

19
20
16
16
18
89

4
5
8
8
8
33

27
27
25
27
27
132

IR (%)
1.89
7.75
60.51
10.56

Panel A. Descriptive statistics for original data

TA (millions NTD)
LIB (millions NTD)
TCAR (%)
97,400
72,800
7.47
470,000
443,000
10.95
3,890,000
3,650,000
33.14
733,000
695,000
3.27
Panel B. Descriptive statistics for regression variables
MTCAR (%)
MOCAR (%)
MFCAR (%)
9.03
6.37
9.10
10.97
8.57
11.12
20.01
16.96
20.12
1.98
1.39
1.93
MHCAR (%)
6.32
8.47
16.95
1.35

OCAR (%)
4.89
8.43
32.16
3.17
LOGTA
18.447
19.900
20.001
0.926

LEV
0.456
0.851
0.956
0.093

Notes: Variable definition: NI net income before extraordinary items; TA total assets; LIB total liabilities; TCAR reported total capital adequacy
ratios; OCAR reported Tier 1 capital adequacy ratios; IR standard deviation (ROA)/[mean(ROA) mean(equity ratio)], which is measured using the
four quarters of data in a specific year; MTCAR annual mean total CAR and MOCAR annual mean Tier-1 CAR; both are measured using the four
quarters of data in a specific year; MFCAR annual mean as-if full-fair-value-based total CAR and MHCAR annual mean as-if cost-based Tier 1 CAR;
LOGTA the natural logarithm of annual mean total assets using the four quarters of data in a specific year; LEV annual mean of debt-to-asset ratios
using the four quarters of data in a specific year

Min
Median
Max
SD

Min
Median
Max
SD

NI (millions NTD)
226,800
1,201
14,300
6,046

Impact of fairvalue-accounting

141

Table II.
Descriptive statistics for
Taiwans listed banks
(27 banks)

1.00
0.95
0.56
0.55
20.09
0.13
20.68
1.00
0.48
0.47
2 0.10
0.11
2 0.60
1.00
0.99
20.24
20.07
20.55

1.00
20.24
20.10
20.53

1.00
0.55
1.00
0.15
0.09
1.00
0.16
0.29
0.96
1.00
0.01
0.01
0.98
0.94
0.13
2 0.07
20.01
20.05
20.59
2 0.56
20.11
20.12
Panel B. Pearson correlations among variables in regressions (2.1)-(2.4)
MTCAR
MFCAR
MOCAR
MHCAR

1.00
0.07
0.32

GT

1.00
20.03
20.01

ADP

1.00
0.31

LOGTA

1.00
0.31

LOGTA

1.00

LEV

1.00

LEV

Notes: Variable definition: ADP 1 if the observation is after the adoption of TFAS No. 34, namely, 2006, while 0 otherwise; GP 1 if bank is numerical
ranking in the ITDRS is above the median among its peers and 0 otherwise; other variables are defined in the same way as described in Table II

IR
1.00
20.04
20.02
20.27
20.26
20.09
20.27
20.02

IR
MTCAR
MFCAR
MOCAR
MHCAR
GT
LOGTA
LEV

Table III.
Pearson correlations for
regression variables

IR
MTCAR
MOCAR
MTCAR ADP
MOCAR ADP
ADP
LOGTA
LEV

Panel A. Pearson correlations among variables in regression (1)

MTCAR
MOCAR
MTCAR ADP
MOCAR ADP

142

IR
1.00
20.04
20.27
20.07
20.14
20.07
20.27
20.01

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2 0.27 to 2 0.02. Some of the correlations appear to be high, so the variance inflation
factor (VIF) scores in all regressions are calculated, with none exceeding 10.
Table IV presents the results from OLS regressions and reports one-tailed p-values
computed from Whites heteroskedasticity-adjusted t-statistics. Column (1) and
Column (3) provide the results of the regressions in which only MOCAR (bank is
mean reported Tier 1 CARs) or MTCAR (bank is mean reported total CARs) is used to
explain IR. As shown, both coefficients are negative and significant ( p-value 0.000),
suggesting that banks with higher levels of Tier 1 capital or total capital are less likely to
become insolvent. Column (2) provides regression results when MOCAR and its
interaction with ADP (the adoption of TFAS No. 34) are used to explain IR. The
coefficient on MOCARi ADPi is 0.188 ( p-value 0.091), demonstrating the weakened
IR-Tier 1 CAR association during the post-TFAS No. 34 periods. Column (4) presents
similar results when MTCAR and its interaction with ADP serve as explanatory
variables, and the coefficient on MTCARi ADPi is 0.193 ( p-value 0.049). As to the
control variables, LOGTA is negative and significant in all specifications (all
p-values , 0.000), indicating that larger banks are less likely to become insolvent. LEV
is not significant (all p-values . 0.100) probably because its ability to explain IR is
dominated by that of CAR, since CAR and leverage may capture similar characteristics
of a bank, but CAR is more comprehensive conceptually. In short, the results shown in
Table IV are consistent with H1(a).

Impact of fairvalue-accounting

143

IRi a1 a2 MCARi a3 MCARi ADP i a4 ADP i a5 LOGTAi a5 LEV i ei

where MCARi MOCARi for Tier 1 CARs, and MTCARi for total CARs
MCAR MOCAR
MCAR MTCAR
Dep. Var. IRi
(1)
(2)
(3)
(4)
MCARi
MCARi ADPi
ADPi
LOGTAi
LEVi
Constant
Mean VIF
Adj.R 2 (%)
No. obs.

20.725 * * *
(0.000)

2 0.977 * * *
(0.000)
0.188 *
(0.091)
2 0.031
(0.106)
20.037 * * *
2 0.038 * * *
(0.000)
(0.000)
0.886
0.896
(0.101)
(0.102)
0.943 * * *
0.992 * * *
(0.000)
(0.000)
3.03
5.10
12.02
12.94
185
185
T-test of a2 a3 0;
F 23.10 ( p 0.00)

20.572 * * *
(0.000)

2 0.834 * * *
(0.000)
0.193 * *
(0.049)
2 0.036 *
(0.071)
20.034 * * *
2 0.034 * * *
(0.000)
(0.000)
0.196
0.200
(0.110)
(0.115)
0.874 * * *
0.930 * * *
(0.000)
(0.000)
3.02
5.90
8.72
9.59
185
185
T-test of a2 a3 0;
F 24.09 ( p 0.00)

Notes: *p , 0.10; * *p , 0.05; * * *p , 0.01; p-values are presented in parentheses; variable

definition; IR standard deviation (ROA)/[mean(ROA) mean(equity ratio)], which is measured
using the four quarters of data in a specific year; MTCAR annual mean total CAR and MOCAR
annual mean Tier-1 CAR, both are measured using the four quarters of data in a specific year; ADP 1
if the observation is after the adoption of TFAS No. 34, namely, 2006, while 0 otherwise; LOGTA the
natural logarithm of annual mean total assets using the four quarters of data in a specific year; LEV
annual mean of debt-to-asset ratios using the four quarters of data in a specific year

Table IV.
Results for the impact of
adopting TFAS No. 34 on
the relevance of CARs

MF
39,2

144

Table V displays the results of the relative relevance of CARs under alternative bases.
Panel A of Table V provides results based on pooled samples. Columns (2.1) and (2.2)
show that MHCAR and MOCAR are significantly and negatively related to IR. The
adj.R 2s for (2.1) and (2.2) are 10.96 and 11.02 percent, respectively. Vuongs Z-statistic,
assessing the difference in adj.R 2s between the two models, is 2 6.860 ( p-value 0.001),
indicating that MHCAR (as-if cost-based Tier 1 CARs) is superior to MOCAR (reported
Tier 1 CARs) in explaining IR. Similarly, the adj.R 2s for Columns (2.3) and (2.4), in which
MFCAR or MTCAR serves as the explanatory variable, are 7.44 and 8.17 percent. The
corresponding Vuongs Z-statistic is 6.288 ( p-value 0.001). Consequently, MTCAR
(reported partially fair-value-based CARs) outperforms MFCAR (as-if
full-fair-value-based CARs). Briefly, these results support H1(b), implying that the
closer to the fair-value basis the CAR, the lower its ability to explain IR.
Table V, Panel B, provides results based only on observations of high disclosure
qualities (GT 1) when comparing the relative relevance of CARs under alternative
degrees of fair-value measurements. The adj.R 2s for (2.1) and (2.2) are 30.02 and
36.24 percent, respectively, while Vuongs Z-statistic is 3.967 ( p-value 0.023). Hence,
different from what was revealed in Panel A, MOCAR outperforms MHCAR in this
subset. Likewise, the adj.R 2s for (2.3) and (2.4) are 27.10 and 15.73 percent, while
Vuongs Z-statistic is 2 2.949 ( p-value 0.070). Thus, MFCAR is superior to MTCAR
as the explanatory variable for IR. Finally, Panel C of Table V displays the results of
regressions (2.3) and (2.4) when only observations of low disclosure quality are used
(GT 0). As expected, Vuongs Z-statistic for comparing (2.1) and (2.2) is 2 5.873
( p-value 0.001), and that for comparing (2.3) and (2.4) is 6.754 ( p-value 0.001);
hence, the results based on low-quality observations present similar patterns to those
based on pooled observations. Overall, Panels B and C in Table V provide consistently
supportive evidence of H2. Briefly, fair-value-based CARs are superior to cost-based
CARs only when banks have higher disclosure quality. As for banks with lower
disclosure quality, cost-based CARs appear to be more informative.
4.2 Robustness checks
Three additional tests were conducted. The first applies two alternative proxies for the
insolvency risk, while the second tests whether excluding 2008 affects the results. The
last considers another operational definition of disclosure quality.
The first robustness check replaces IR with another two proxies for banks
insolvency risks, ADZ and ADZP, in all regressions. As specified in Lepetit et al. (2008),
ADZ is defined by dividing (100 average ROE) by SD (i.e. standard deviation) of
ROE while ADZP is calculated using the following equation:
ADZP

average ROA average Total equities=Total assets

SD of ROA
SD of ROA

Since the underlying manner for calculating ADZ and ADZP is conceptually very close
to the way IR is calculated, this adjustment should not cause a significant difference,
while the un-tabulated results further confirm the robustness of the results in
Tables IV and V.
Second, even though year dummies are included in regressions reported in Table V,
there may still be some concern about whether including 2008 affects the results.

Adj.R 2 (%)
Vuongs Z-statistic

Constant

LEVi

LOGTAi

Panel B. GT 1 (obs. 33)

MCARi
2 4.971 * *
(0.004)
2 0.076 * * *
(0.000)
0.376
(0.460)
2.043 * * *
(0.000)
30.02
3.967 * *
(0.023)

26.860 * *
(0.001)
2 4.838 * *
(0.004)
2 0.072 * * *
(0.000)
0.202
(0.431)
1.959 * * *
(0.000)
36.24

2 0.729 * * *
(0.000)
2 0.040 * * *
(0.000)
0.994
(0.124)
0.953 * * *
(0.000)
11.02

2 8.962 * *
(0.039)
2 0.037 * *
(0.041)
3.491
(0.109)
1.840 * *
(0.032)
27.10

2 0.478 * * *
(0.000)
2 0.034 * * *
(0.000)
0.485 *
(0.095)
0.857 * * *
(0.000)
7.44

IRi a1 a2 MCARi a3 LOGTAi a4 LEV i a5 D_YR ei

(2.1)MCAR MHCAR
(2.2)MCAR MOCAR
(2.3)MCAR MFCAR

Panel A. Pooled samples (obs. 132)

MCARi
2 0.693 * * *
(0.000)
LOGTAi
2 0.037 * * *
(0.000)
LEVi
0.885
(0.111)
Constant
0.945 * * *
(0.000)
Adj.R 2 (%)
10.96
Vuongs Z-statistic

Dep. Var. IRi

22.949 *
(0.070)

6.288 * *
(0.001)

(continued)

2 6.286 * *
(0.049)
2 0.036 * *
(0.023)
4.490
(0.132)
1.516 * *
(0.022)
15.73

2 0.582 * * *
(0.000)
2 0.034 * * *
(0.000)
0.198
(0.120)
0.877 * * *
(0.000)
8.17

(2.4)MCAR MTCAR

Impact of fairvalue-accounting

145

Table V.
Relative relevance
of CARs under
alternative bases

Table V.
2 0.679 * * *
(0.000)
2 0.037 * * *
(0.000)
0.937
(0.158)
0.932 * * *
(0.000)
11.55
25.873 * *
(0.001)

2 0.071 * * *
(0.000)
2 0.036 * * *
(0.000)
0.883
(0.164)
0.928 * * *
(0.000)
12.08

2 0.474 * * *
(0.000)
2 0.034 * *
(0.001)
0.545
(0.100)
0.865 * * *
(0.000)
3.70
6.754 * *
(0.001)

2 0.578 * * *
(0.000)
2 0.034 * *
(0.001)
0.201
(0.128)
0.883 * * *
(0.000)
8.89

(2.4)MCAR MTCAR

Notes: *p , 0.10; * *p , 0.05; * * *p , 0.01; p-values are presented in parentheses; variable definition; variable definition: MTCAR annual mean total
CAR and MOCAR annual mean Tier-1 CAR; both are measured using the four quarters of data in a specific year; MFCAR annual mean as-if full-fairvalue-based total CAR, and MHCAR annual mean as-if cost-based Tier-1 CAR; GP 1 if bank is numerical ranking in the ITDRS is above the annual
median among its peers and 0 otherwise; other variables are defined in the same way as described in Table IV; year dummy variables are included (but not
reported) in all regressions; a positive and significant Vuongs Z-statistic implies that the residuals produced by the base regression are larger in
magnitude than those from the alternative regression; for instance, the positive and significant Z-statistic (6.288) when comparing (2.3) and (2.4) using the
pooled sample indicates that (2.3) is inferior to (2.4) in explaining IRi

Adj.R 2 (%)
Vuongs Z-statistic

Constant

LEVi

LOGTAi

Panel C. GT 0 (obs. 99)

MCARi

IRi a1 a2 MCARi a3 LOGTAi a4 LEV i a5 D_YR ei

(2.1)MCAR MHCAR
(2.2)MCAR MOCAR
(2.3)MCAR MFCAR

146

Dep. Var. IRi

MF
39,2

Hence, all regressions are re-conducted based on observations other than 2008. Similar
results show that:
.
adopting TFAS No. 34 weakens the ability of CARs to explain insolvency risks
( p-value 0.045); and
.
fair-value-based CARs outperform cost-based ones only when the disclosure
quality is high.
In other words, the results are not affected by the data from 2008.
Finally, the third adjustment considers another method of coding disclosure quality.
Although prior studies indicate that a relative ranking of disclosure quality is preferred,
the original ranking is alternatively used to replace GT when comparing regressions
(2.1) and (2.2), and regressions (2.3) and (2.4). Because observations receiving a B grade
are so few, combining those receiving B and A grades is inevitable for empirical reasons.
After observations are partitioned into two groups (those with B and A grades versus
those with A ), the relative relevance of regression (2.1) versus (2.2) and regression (2.3)
versus (2.4) is assessed again. Un-tabulated results reveal qualitatively similar
(nevertheless, less significant) findings.
5. Concluding remarks
This study is the first to examine the impact of a fair-value-accounting regime on the
relevance of CARs. Although numerous accounting studies have supported the
incremental relevance of fair-value-based metrics from the valuation perspective,
the banking industry has argued that CARs based on fair-value metrics may not reflect
the underlying fundamentals of a banks capital. Using data from Taiwan banks
between 2004 and 2010, the results show the following:
.
adopting TFAS No. 34 reduces the relevance of CARs in explaining banks
insolvency risks;
.
fair-value-based CARs are superior to cost-based ones in relation to insolvency
risks only for banks of higher disclosure quality; and
.
cost-based CARs outperform fair-value-based ones when banks have lower
disclosure quality.
Hence, the results are in consistent with Shaffers (2011) findings that implementing
fair-value accounting more broadly may not necessarily provide financial statement
users with more useful reporting. Meanwhile, the implication similar to Khurana and
Kim (2003) is that investors should evaluate the availability of sufficient disclosure
before relying on banks fair-value measures.
Overall, the results can also be interpreted to suggest that adopting fair-value
accounting is not flawless, and may sometimes result in misleading information. In
particular, users who mistakenly believe that fair-value-based measures are always
more relevant may make incorrect decisions because fair-value measures outperform
cost-based ones only under the condition of high reporting transparency. In contrast, in
cases where banks do not provide a sufficient level and quality of disclosure, reverting to
cost-based measures may be a more reliable and relevant alternative. Therefore,
standard-setters should take into account regulators information need and seek
potential solutions, such as explicitly requiring the disclosure of cost-based CARs and

Impact of fairvalue-accounting

147

MF
39,2

148

forcing banks to improve disclosure quality, to address the unintended adverse

outcomes from the ongoing application of full-fair-value accounting in the near future.
Although this study addresses an important omission in the literature about the
application of fair-value accounting in the banking industry from the regulatory
perspective, the interpretation of the results is tempered by several limitations. For
instance, although the use of Taiwan banks offers several advantages for empirical
testing (as mentioned in Section 1), any direct generalization to all international or US
firms should be carried out with caution due to the relatively limited number of Taiwan
banks. However, this study has attempted to derive robust results by conducting
time-series and cross-sectional analyses[23], and this research design may serve well as
a starting point for future research that aims to assess the regulatory impact of
fair-value accounting in other jurisdictions.
Notes
1. In 1988, the BCBS in Basel, Switzerland, published a set of minimum capital requirements
for banks. This is also known as the 1988 Basel Accord (i.e. Basel I), was enforced by law in
the Group of Ten (G10) countries in 1992, and was widely accepted internationally. As it
soon appeared that the Basel I framework had many weaknesses, a revised proposition was
issued in June 2004, known as Basel II. Recently, in the aftermath of the financial crisis,
several major revisions and additions have been made to Basel II. The new proposed capital
framework, known as Basel III, was endorsed by the G20 at the November 2010 Summit in
Seoul.
2. In fact, some even believe that fair-value reporting was one of the contributors to the
sub-prime financial disaster, as the reporting exacerbated the banks crises. At the time, the
observed market prices were significantly lower than the fundamental values of assets,
causing sharp reductions in CARs, and hence, banks may have been forced into acquiring
additional (expensive) capital (Allen and Carletti, 2008; Heaton et al., 2010; Khan, 2010;
Kothari and Lester, 2011).
3. Taiwan Financial Accounting Standards No. 34, Accounting for Financial Instruments.
4. The insolvency risk, measured by the insolvency risk index, is generally defined as a
percentage, while the numerator is the standard deviation of a return on asset (ROA) and the
denominator is the ROA plus equity ratio (McAllister and McManus, 1992; Lin et al., 2005).
5. Total (Tier 1) CARs refer to the ratio of total regulatory capital (Tier 1 capital) to
risk-weighted assets. Tier 1 CARs are usually emphasized as much as total CARs (Berger
et al., 2008; Blankespoor et al., 2010).
6. Since 2001, the Taiwan authority has set the convergence to international accounting
principles (IFRS) as the first priority. Since then, numerous Taiwan accounting standards
have been revised based on IFRSs. For instance, the authority clearly states that IAS 39 is
the benchmark when formulating TFAS No. 34 (Chou, 2010; Bischof et al., 2012). Moreover,
since it is well-known that IAS 39 and SFAS 133 are very similar standards (Moore, 2002;
Will, 2002), it is reasonable to expect that evaluating the impact of adopting TFAS No. 34
would yield useful implications for other jurisdictions that apply fair-value-accounting based
on IFRS or US GAAP.
7. Tier 1 capital generally refers to the sum of core capital elements (capital stock, surplus,
undistributed profits, qualifying noncumulative perpetual preferred stock, and minority
interest in the equity accounts of consolidated subsidiaries) less goodwill and other
intangible assets, without any gains or losses on available-for-sale securities included.

8. Tier 2 capital usually includes the sum of the allowance for loan and lease losses (with some
limits), perpetual preferred stock not qualifying as Tier 1 capital, subordinated debt, and
intermediate-term preferred stocks. Tier 3 capital mainly consists of the total amount of the
short-term subordinated debts and the non-perpetual preferred stock, and can be used only
to cover market risk.
9. Other studies such as Barth et al. (2004) document the opposite; they indicate that
undercapitalized banks turn to riskier investment portfolios. Still others, therefore, such as
Calem and Rob (1999), argue that a U-shaped relationship exists between capital and
insolvency risks.
10. SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities.
11. SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities.
12. Some studies examine whether the application of fair-value accounting enhances banks
ability to report opportunistically (Huizinga and Laeven, 2012; Guo and Matovu, 2012) or
whether it may distort financial reports (Gaynor et al., 2011).
13. Biddle et al. (1995) state that in the absence of an explicit test for examining whether one
measure (e.g. fair value) alone is equally, less, or more informative than another measure
(e.g. historical cost), incremental information content tests of one over the other cannot imply
which one is superior to the other when served as the only explanatory variable.
14. Barth et al. (1995) examines whether fair-value-based CARs help predict future regulatory
capital violations, compared with those based on historical cost. However, one notable caveat
about Barth et al. (1995) is that banks regulatory capital ratios are not readily available in
annual reports, so the authors estimated each banks regulatory capital ratio as the book
value of equity plus an allowance for loan losses divided by total assets plus an allowance for
loan losses, where the book value of equity and total assets is calculated under historical and
fair-value accounting methods.
15. Khurana and Kim (2003) compare the relative explanatory power of fair-value and historical
cost in explaining equity values, using the US banking holding companies as the sample.
16. The procedure will be thoroughly explained in Section 3.
17. Since Tier 1 CARs are usually emphasized as much as total CARs (Estrella et al., 2000;
Berger et al., 2008; Blankespoor et al., 2010), both are included in the analysis.
18. Some may be interested in whether the relative relevance of fair-value- and cost-based CARs
may vary over the sample periods. The CARs explanatory power may increase with time
because banks may be more familiar with using more appropriate valuation models and
hence provide more informative fair-value-based CARs. Thus, a simple test is conducted by
regressing the insolvency risk on the CAR and the interaction between the CAR and the
transformed year dummies. The transformed dummies are coded as 0, 1, . . . 4, which means
the original numerical year less the base year (i.e. 2006); because there are no fair-value-based
CARs before 2006, data from 2004 to 2005 are excluded from this simple test. In short,
finding the interaction between the CAR and transformed year dummies to be negative will
support the conjuncture that the fair-value-based CAR improves in its ability to explain the
insolvency risk over time. The result shows only a marginally significant negative
coefficient on this interaction item ( p-value 0.097).
19. Refer to Appendix 1 for an instance of calculating as-if CARs using actual bank data.
20. The ITDRS is conducted once a year, and aimed to establish a ranking that is suitable for
Taiwan and compatible with the rest of the world. Corporations are evaluated based on
81 possible information attributes grouped into five sub-categories: (1) compliance with the
mandatory disclosures; (2) timeliness of reporting; (3) disclosure of an annual report;

Impact of fairvalue-accounting

149

MF
39,2

150

(4) disclosure of a financial forecast; and (5) a corporate website disclosure. See Appendix 2
for more details on the ITDRS.
21. The disclosure-ranking mechanism assigns A , A, B, C, and C 2 to firms, but no
observations in the sample banks receive a ranking below B, and hence A is coded as 2,
A as 1, and until B as 0. This coding method is extensively used in prior studies on disclosure
quality and credit ratings (Adams et al., 2003; Amato and Furfine, 2004; Huang et al., 2005;
Chi, 2009).
22. Brown and Hillegeist (2007) examine potential mechanisms through which disclosure
quality reduces information asymmetry. Shaw (2001) explores the interaction between
corporate disclosure and recognition practices by examining the relation between financial
analysts ratings of disclosure quality, discretionary accruals, and the earnings-return
association. Byard and Shaw (2003) examine how the quality of corporate disclosures affects
the precision of information that financial analysts incorporate in their forecasts of annual
earnings. In all these studies, a firms disclosure quality is superior if the firms original score
is above the median among its peers.
23. The time-series analysis refers to the test of looking at a regime change, and the
cross-sectional analysis is conducted by comparing fair-value-based CARs and cost-based
ones.
24. TSE refers to the Taiwan Stock Exchange Corporation, and GTSM stands for the GreTai
Securities Market.
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Impact of fairvalue-accounting

153

Appendix 1

Panel A. Calculating as-if cost-based Tier 1 CARs (in millions of New Taiwan Dollars, except for CARs)
(3) (1)/
(1)
(2)
(2)
(4)
(5) (1)-(4)
(6) (5)/(2)
Reported
Reported
Reported Valuation
As-if cost-based
As-if cost-based
Tier 1
riskTier 1
adjustments for
Tier 1 capital
Tier 1 CARs
Capital
weighted
CARs
trading securities
assets
168,816,958 1,486,972,081 11.35307% 28,197,443
177,014,401
11.90435%
Panel B. Calculating as-if full-fair-value-based Total CARs (in millions, except for CARs)
(9) (7)/
(11) (7) (10)/
(7)
(8)
(8)
(10)
0.45 0.55
(12) (11)/(8)
As-if full-fairReported
Reported
Reported Valuation
As-if full-fairtotal
risktotal CARs adjustments for
value-based total value-based
total CARs
capital
weighted
available-for-sale
capitala
assets
securities
172,902,518 1,486,972,081 11.62783% 7,335,555
181,868,196
12.23077%
Notes: aThe regulatory guidance specifies that only 45 percent of the changes in fair values for
available-for-sale securities are included in Tier 2 capital, so the as-if full-fair-value-based CARs can be
obtained by adding the remaining 55 percent of the changes in fair values for available-for-sale
securities to Tier 2 capital
Source: (Data collected from the 2008 Bank of Taiwan annual report)

Table AI.
An instance of the
calculation of as-if CARs

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39,2

154

Appendix 2. Detailed introduction of the ITDRS

To reform Taiwans corporate governance system through integrated planning and gradual
movement, the Securities and Futures Bureau (SFB) launched The Project for Planning,
Promotion, and Implementation of the Corporate Governance System in Taiwan. The
Information Disclosure Evaluation Committee (the Committee) was organized as a group, and
established the ITDRS in Taiwan. The ranking is conducted once a year. This Committee
noted relevant opinions from scholars, experts, professional investment organizations, and listed
companies, studied how other countries implemented information disclosure systems, and
evaluated a specific need in Taiwan for such a system. As a result, the committee established an
ITDRS that was suitable for Taiwan and compatible with the rest of the world. The committee
made an objective evaluation on the information transparency of the listed corporations, and
released the first evaluation results on May 10, 2004. Almost all corporations listed in
TSE/GTSM[24] are covered by the ranking. Corporations are evaluated based on 81 possible
information attributes, which are grouped into five sub-categories:
(1) compliance with the mandatory disclosures;timeliness of reporting;
(2) disclosure of an annual report;
(3) disclosure of a financial forecast; and
(4) corporate web site disclosure.
About the author
Yi-Ping Liao is an Assistant Professor at Ming Chuan University in Taiwan. Her research
interests include issues regarding financial reporting and regulation for banks and insurance
firms. Yi-Ping Liao can be contacted at: d93722002@ntu.edu.tw

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