Research About The Influence Of Business Structure On The Operational Performance And Risk Of Securities Firms

As the most important financial intermediary, securities firms play a key role in the capital market function. However, with the development of the domestic and international economy, the securities companies are facing increasing challenges. On the one hand, as the trend of interest rate marketization and RMB internationalization, the securities industry will face greater market risk, on the other hand, under the trend of financial mixed operation, more and more institutions will join in the competition, which make the profit space of the securities industry getting smaller and smaller. Furthermore, policies including floating commission and the stock account liberalization are squeezing the profit margin of brokerage business. So in the near future,the financial markets will more competitive and the situation will be grimmer in China. For the securities firms, the traditional business that depend on the channel model has not adapted to the new market environment, so there is an urgent need for diversified transformation.In our specific institutional background and market environment, the brokerage business transformation is not an independent behavior. If the firms want to start new business, establish new networks, raise capital in stock market, it must be approved by the China Securities Regulatory Commission (CRSC). As early as 2004, CRSC is committed to promoting the innovation of securities industry. Then in 2007, the promulgation of ?The securities classification guidelines(for trial implementation)? marked the beginning of classified regulation era of China security industry. Today, the Classified Regulation has been implemented for more than 8 years and CRSC rates all the securities companies into the 5 major categories of 11 levels every year. In accordance with the rating results, CRSC implement different regulatory policy for different rated firms. Under this Regulatory environment, our thesis will study on the operating performance and risks of diversified firms in the security industry. Our paper hopes to make recommendations for better transformation of securities companies under the classified of the regulatory environment.The diversification on the effects of business performance and risk has been a controversy subject in the academic field. So it is a worthwhile topic to research. Therefore, based on the above background, our paper puts forward 4 problems:(1)Whether business structure diversification has enhanced the performance and reduced the risk at the present stage in the security industry?(2) Whether the impact of diversification on performance and risk is different in different rated firms?(3)How to make better transformation by make use of classified regulatory policy for different rated securities firms?(4) Whether the classified regulatory policy has played a good role in promoting the steady transformation in the security industry?In order to solve the above 4 problems, we divided our paper into 5 parts, which including theoretical basis, present situation analysis of business structure, the influence mechanism of business structure on the performance and risk, the empirical test, and policy suggestions. In the first part, on one hand we summarized the three aspects of the classical theories, including business diversification, financial innovation and financial supervision theory. On the other hand, in order to fully understand the research status in this field, we also reviewed many authoritative researches at home and abroad. In the second part, our paper elaborated regulation background, which is the most important factor for the formation of China's securities business structure. Then we studied how the Classification regulation policy has influenced the Securities business structure. Next, the evenness and diversity of business structure were be analyzed. Besides, our paper has made a comparative analysis between China brokerage and the US investment bank in order to reflect our business structure problems. In the third part, On the basis of above analysis, we come back to focus on the our core theme and give an intensive study on the relationship between business structure and profit model, business structure and business risk, and we also analyzed the cost-benefit a of business diversification. All the studies above laid a solid foundation for the following empirical analysis.In the empirical part, unlike other research, our paper tried to cover the whole industry samples, and finally we used the data of 88 brokerage firms in 2010-2014. Firstly, the regulatory rating factor and corresponding interaction factor have been added in our model that can help us to study the impact of the regulatory environment and can also help us to learn the relationship between regulatory environment and the diversified business effects. Firstly, instead of using a single index to measure the key indicators, we have chosen to definite several indicators. Specifically, we used Adjusted Herfindahl Index (AH)to measure business equilibrium and used the scope of business(SCOPE) disclosed in the annual report of securities firms to measure breadth of business, both of which can measure the degree of business diversification. In addition we have chosen ROE as the measure of operating performance and have chosen Standard deviation of ROE(SDROE)and Capital adequacy ratio(CAR) as the measure of operating risk. Thirdly, we established the panel regression model, and analyzed the empirical results,on the basis of which we finally have drawn 5 conclusions.(1)Business diversification can improve the operating performance of securities firms. In the empirical study, the business structure indicators and ROE are significantly positively correlated.(2)The influence of business diversification on business performance differ in different rated levels securities firms. First of all, Low-rated securities showed a higher marginal revenue diversification. In the empirical test, business diversification index of low-rated securities have a higher ROE sensitivity coefficient. Generally speaking, low-rated securities are not only Smaller than high-rated securities in scale, but also are subject to tighter regulation, which highly suppressed their diversification process. Secondly, highly rated securities have "diversification discount". Compared with lower-rated securities, highly rated securities have less sensitivity coefficient. Moreover, the sensitivity coefficient even turns to negative when the rating above a certain level.(3) The extent of the influence on business risk depends on the diversified business stage. In the empirical analysis, the improvement of revenue equalization reduced the volatility of operating performance, and did not brought much impact to the capital adequacy level. However, the expansion of business scope intensified the operating performance volatility, and it also led to a decline in capital adequacy. In fact, the business scope indicators is a leading indicators index for income equalization, which means that the income equalization will not be improved at initial stage of the business scope expansion, and it will be improved only when the new business profit model become stable. It is at this stage that the business scope expansion will reduce the operating risk.(4) The influence of business diversification on business risk also differ in different rating levels securities firms. Compared to the low-rated securities, with the expansion of business scope, higher-rated securities have smaller the impact on operating performance and the capital adequacy. Besides, if the rating is higher than a certain level, the level of capital adequacy will increase rather than decreasing.(5) To some extent, industry classification regulation can promote smooth transition in the securities industry. Combined with the 4 conclusions mentioned above, we can find that highly rated securities have characteristics of low-risk low-yielding, but lower-rated securities with high risk and high return characteristics in the process of diversification. Thus limiting low-rated securities business expansion impulse and giving the high -rated securities more diversified space can reduce the risk of financial system. In addition, the paper also found that the increase in the rating itself will increase brokerage business risk. We speculated that high rating may lead to blind expansion of business scale and too fast diversification process, which result in a "moral hazard" problem.Finally, based on the empirical conclusions, our paper put forward some suggestions from the perspective of the diversification of securities firms and the classified supervision.(1) Diversification is an industry-wide choice. Both the high-rated and low-rated firms should make diversified business transformation, only in this way can find the new profit area.(2) Securities firms should choose their diversified development mode combined with their actual situation.The excellent firms can pursuit a larger business boundary for a greater degree of diversification while the weaker firms should seek for a balanced development between several intensive businesses.(3) The securities firm can find direction according to the rating of Classified Regulation. For instance, high-rated securities must pay more attention to the diversification risk and be not too aggressive in the diversification transition. Otherwise, they will be subject to more stringent regulatory and bear the loss of reputation. Low-rated securities should put risk management of the existing businesses in the first place, in order to get more opportunities to apply the new business qualifications.(4)For the Classified Regulation, it is need to strengthen the during and after regulation.what's more, the regulation should be extended to in specific areas of the diversification in the securities industry.This paper has achieved the expected goal of the research. By put the regulatory factor into the empirical model, we have studied the relationship between income structure and business effects more completely and more thoroughly. Our paper has done large normative analysis, which has been applied to the interpretation of empirical results and has helped us to get many meaningful conclusions. Finally, the empirical conclusions of this paper answer the 4 questions that have been raised before.The deficiency of our paper is that we could not get the data of the qualifications about the innovation businesses, only using the business scope to measure the business diversity. Otherwise, more meaningful conclusions may be drawn.