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 FINANCIAL ANALYSIS OF PRIVATE HIGHER

EDUCATIONAL INSTITUTIONS IN TAIWAN:

AN ASSESSMENT AND DEVELOPMENT

by

Wang-Chien Kao

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Dissertation Committee:
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Professor Sharon A. McDade, Sponsor
Professor William Baldwin
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Approved by the Committee on

the Degree o f Doctor of Education
D *e SEP 2 9

Submitted in partial fulfillment o f the

requirements for the Degree o f Doctor o f Education in
Teachers College, Columbia University

1997

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 UMI Number: 9810962

Copyright 1997 by
Kao, Wang-Chien

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All rights reserved.
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UMI Microform 9810962

Copyright 1997, by UMI Company. All rights reserved.

This microform edition is protected against unauthorized

copying under Title 17, United States Code.

UMI
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© Wang-Chien Kao 1997

All Rights Reserved

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 ABSTRACT

FINANCIAL ANALYSIS OF PRIVATE HIGHER

EDUCATIONAL INSTITUTIONS IN TAIWAN:

AN ASSESSMENT AND DEVELOPMENT

Wang-Chien Kao

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This study analyzes the financial status of private higher educational
institutions in Taiwan by tailoring and applying the common financial analysis
models used in the U.S. The study is grounded in a cross-sectional analysis of
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historical financial data from Taiwan's 17 private colleges and universities.
The differences among universities, medical colleges, technology colleges, and
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reformed ones are also compared.
The statistical results indicate that these private universities and colleges
are equipped with strong financial structures. Low liabilities along with large
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fund balances give these institutions excellent creditworthiness, so that a dollar

o f debt is covered by 25 dollars o f fund. Each institution's capital fund is
sufficient to support more than three years of expenditures. The analysis also
shows that those institutions reward relatively high returns. Several pieces of
information, however, show that the financial policies of the institutions are
too conservative to facilitate the long-term development of schools. The
results also show that colleges, especially reformed ones, are more profitable
with much less liabilities than universities.

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 The statistical results may be used as indicators for these selected
institutions, as well as future institutions. Individually, an institution could use
these ratios as benchmarks for self-examination to determine its own financial
standing. The study also suggests a set of financial indicators and an
evaluating model for the MOE, administrators, and founders of private
institutions.

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 TABLE OF CONTENTS

Chapter
Page

I. INTRODUCTION................................................................ I

Background o f the Problem............................................ I

Purpose o f the Study....................................................... 5

Research Questions......................................................... 6

Assumptions, Delimitations, and Limitations

o f the Study................................................................ 7

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Assumptions.............................................................. 7

Delimitations.............................................................
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Limitations................................................................. 8

Definition o f Key T erm s................................................ 10

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Organization of the Study............................................... 11

H. LITERATURE REVIEW.................................................... 12
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Overview o f Higher Education in Taiw an.................... 12

Historical Development of Higher Education

in Taiwan.............................................................. 13

Influences on the Taiwanese System o f

Higher Education................................................. 17

Current Status o f Higher Educational System

in Taiwan.............................................................. 18

Funding o f Higher Education in Taiw an................. 25

Financial Ratio Analysis................................................. 31

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Chapter
Page

Development of Financial Ratio A nalysis............... 31

Application o f Financial Ratio Analysis

for Higher Education........................................... 35

Limitations o f Financial Ratio Analysis

for Higher Education........................................... 39

Conclusion....................................................................... 41

HI. METHODOLOGY................................................................ 42

Sam ple............................................................................. 42

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Data Collection............................................................... 44
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Data Organization........................................................... 44

Model Building............................................................... 49
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Financial Model Creation and Testing........................... 55

IV. RESULTS ANALYSIS AND RECOMMENDATION 58

Balance Sheet Ratios, Including Fund Balance

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to Total Debt Ratio and Capital Fund to

Total Expenditure Ratio............................................ 59

Ratio 1: Fund Balance to Total Debt

(Fund Balance/Total D ebt).................................. 59

Ratio 2: Capital Fund to Total Expenditures

(Capital F und/Total Expenses)............................ 62

Net Operation Ratios, Including Net Total Revenues

to Total Revenues Ratio, Net Educational and
General Revenues to Total Educational and
General Revenues Ratio, New Other Revenues to
Total Other Revenues Ratio, Return on Assets
Ratio, and Total Asset Turnover............................... 64

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 Chapter Page

Ratio 3: Net Total Revenues to Total Revenues

(Net Total Revenues/Total Revenues)................ 64

Ratio 4: Net Educational and General Revenues

to Total Educational and General Revenues
(Net Educational and General Revenues/Total
Educational and General Revenues)................... 69

Ratio 5: Net Other Revenues to Total Other

Revenues (Net Other Revenues/Total Other
Revenues).............................................................. 72

Ratio 6: Returns on Assets Ratio (Net Total

Revenues/Total Assets)........................................ 74

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Ratio 7: Total Assets Turnover (Total
Revenues/Total Assets)........................................ 76
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Contribution Ratios, Including Tuition and Fees
to Total Educational and General Expenditure
Ratio and Grant and Subsidy to Total
Educational and General Expenditure R atio 77
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Ratio 8: Tuition and Fees to Total Educational

and General Expenditures (Tuition and
Fees/Total Educational and General
Expenditures)....................................................... 77
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Ratio 9: Grants and Subsidies to Total

Educational and General Expenditures
(Grant and Subsidy/Total Educational and
General Expenditures)......................................... 80

Demand Ratios, Including Instruction to Total

Educational and General Revenues Ratio,
Research and Scholarship to Total Educational
and General Revenues Ratio, Educational
Service to Total Educational and General
Revenues Ratio, Academic Support to Total
Educational and General Revenues Ratio, and
Operation and Maintenance o f Plan to Total
Educational and General Revenues R atio................ 82

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 Chapter Page

Ratio 10: Instructional Expenses to Total

Educational and General Revenues (Instruction
Expenditures/Total Educational and General
Revenues)................................................................. 82

Ratio 11: Research and Scholarship to Total

Educational and General Revenues (Research
and Scholarship Expenditures/Total Educational
and General Revenues)............................................ 88

Ratio 12: Educational Service to Total

Educational and General Revenues
(Educational Service Expenditures/Total
Educational and General Revenues)....................... 89

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Ratio 13: Administrative Expenses to Total
Educational and General Revenues
(Administrative Expenditures/Total
Educational and General Revenues)................... 91
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Ratio 14: Operation and Maintenance Expenses
to Total Educational and General Revenues
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(Operation and Maintenance Expenditures/
Total Educational and General Revenues) 92

Creditworthiness Ratios, Including Total Assets

to Total Liabilities Ratio and Debt Service
to Total Revenues Ratio............................................ 94
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Ratio 15: Total Assets to Total Liabilities

(Total Assets/Total Liabilities)........................... 94

Ratio 16: Debt Service to Total Revenues

(Debt Service/Total Revenues)........................... 96

Summary......................................................................... 98

V. CONCLUSION.................................................................... 99

The Financial Status of the Institutions.......................... 100

Universities............................................................... 101

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Chapter Page

Colleges..................................................................... 103

Index of Financial Ratios................................................ 106

Ratio 1: Fund Balance to Total D ebt....................... 107

Ratio 2: Capital Fund to Total

Expenditures......................................................... 107

Ratio 3: Net Total Revenues to Total

Revenues.............................................................. 108

Ratio 4: Net Educational and General

Revenues to Total Educational and

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General Revenues................................................ 108

Ratio 5: Net Other Revenues to Total

Other Revenues...................................................
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Ratio 6: Returns on Assets Ratio............................. 110

Ratio 7: Total Assets Turnover................................ 110

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Ratio 8: Tuition and Fees to Total

Educational and General Expenditures............... 111

Ratio 9: Grants and Subsidies to Total

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Educational and General Expenditures............... 111

Ratio 10: Instructional Expenses to Total

Educational and General Revenues..................... 112

Ratio 11: Research and Scholarship to Total

Educational and General Revenues..................... 112

Ratio 12: Educational Service to Total

Educational and General Revenues..................... 113

Ratio 13: Administrative Expenses to Total

Educational and General Revenues..................... 113

Ratio 14: Operation and Maintenance Expenses

to Total Educational and General Revenues 114

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 Chapter Page

Ratio 15: Total Assets to Total Liabilities.............. 114

Ratio 16: Debt Service to Current Fund

Revenues.............................................................. 115

Recommended Financial Model for Regulators,

Founders, and Administrators................................... 115

1. Fund Balance and Capital Expenditures............. 116

2. Return R ates......................................................... 116

3. Supply Ratios........................................................ 117

4. Demand Ratios..................................................... 117

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5. Turnover Rates..................................................... 117
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6. Financial R isk..................................................... 117

7. Advance FundsAccounting................................ 118

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Suggestions for Further Research................................... 118

Summary.......................................................................... 120

REFERENCES...................................................................... 121
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 Appendix
Page

A. Results o f Individual Institutions........................................... 127

B. Results o f Four Subgroups...................................................... 144

C. Inter-Institutional Comparison............................................... 152

D. Results o f Median................................................................... 156

E. Contents o f Accounts Used.................................................... 157

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LIST OF TABLES

Table
Page

1. Educational Expenditures in Taiwan (1971 to

1993) 16

2. List o f Private Institutions..................................................... 21

3. Typical Example of an Annual FinancialStatement 45

4. Financial Ratios Analysis Applied........................................ 50

5. Method o f Analysis............................................................... 56

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6. Results o f Total Sample........................................................ 65

7. Results o f Universities (Cross-sectional)..............................

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8. Results o f Colleges (Cross-sectional)................................... 84

9. Results o f Universities (By Y ear)........................................ 85

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10. Results o f Colleges (By Year)............................................... 86

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Chapter I
INTRODUCTION

This study is designed to create a financial analysis model for Taiwan's

private colleges and universities by applying the concept o f financial ratio

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analysis commonly used in U.S. higher education. The study is grounded in a
cross-sectional analysis o f historical financial data from Taiw an's 17 private
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colleges and universities. The institutions are grouped according to financial
health, then ratios for key economic factors are compared. From this
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investigation, a template has been created that can serve as the foundation for
a financial analysis model for application to independent colleges and
universities in Taiwan. The results of the study can then be used to examine
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the financial health of these institutions and develop a set of indicators that will
be used to determine financial impairment or insolvency.

Background of the Problem

Education is the foundation for national economic development. Higher

education is especially important if a country seeks to move into the ranks of
developed nations. Education always contributes significantly to national

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modernization, playing an indisputably significant role in that progress

(Ministry of Education, 1993).
With 21 million people and an area of nearly 14,000 square miles,
Taiwan has experienced dramatic economic growth and significant social
progress during the past four decades. Per capita income in Taiwan rose from
$300 in 1949 to $11,000 in 1994, an average 7% annual growth. Today,
Taiwan is referred to as an economic "little tiger" (Yearbook o f the R .O .C ..
1994). Education is widely recognized as one of the major factors for the
country's successful growth.

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The cultural emphasis placed on education is reflected in the country's
Constitution. Chapter 13 o f the Constitution regulates the national policy of
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education by highlighting the importance of education and mandating its
content and financial support. Article 164 distinguishes the educational budget
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from other expenditures. It requires that annual educational expenditures be
no less than 15% of the central governmental budget, no less than 25% of the
provincial governmental budget, and no less than 35% of the city and county
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governmental budget. This article forces Taiwan's various levels of

governments to emphasize education. Higher education in Taiwan is
monitored by the central government. The larger the annual educational
budget, the greater the opportunities for the development o f higher education
in Taiwan.
Newly released statistics (Education Statistics of the Republic o f China,
1994) indicate that expenditures by the government for higher education have
doubled during the past five years. The number of postsecondary college and
university students has increased from 207,479 (public 71,659; private

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135,820) to 285,982 (public 126,887; private 159,095). Despite this increase

in size, the higher education system still does not have the capacity to fulfill
the educational needs of the country.
During the past decade, the government removed the lim itation on
applications for new higher educational institutions. As a result, many new
institutions have been founded. Higher education in Taiwan changed from a
closed, protected market to more of a buyer's market. This increase in the
number o f colleges and universities has created a climate of intense
competition. As the competition has intensified, questions o f operating

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efficiency and financial health are of greater concern than at any time in the
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An institution's financial health is measured in terms o f its revenues,
expenditures, and capital structure. For a university or college, this critical
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information reflects not only its operating performance but also its potential
development. An educational institution that is financially healthy is in a
better position to achieve its educational objectives. Conversely, an institution
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with insufficient financial resources will be limited in its capacity to deliver its
educational programs and plan for its future development.
During the past two decades, many researchers or organizations, such as
Anderson (1983), Taylor, Meyerson, and Massy (1993), Taylor, Meyerson,
M orrell, and Park (1991), and the Peat Marwick Corporation (1987), have
developed effective models for analyzing the financial condition of higher
education in the U.S. that have implications for Taiwan. Can these concepts
of financial analysis be applied to colleges and universities in Taiwan? If so,
what are the similarities and differences that must be taken into account?

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As a foundation, this study takes as a given that a strong system of

colleges and universities is critical for Taiwan's national well-being.
Surprisingly, no study has focused on the financial health o f Taiwanese higher
education either in individual institutions' time series development or for
cross-institutional comparison, after a systematic screening. Certainly, the
state o f higher education research in Taiwan is far behind that found in the
United States.
As o f 1995, the higher education system in Taiwan consists of 28 public
institutions and 23 independent institutions. As in the U .S., public institutions

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derive most of their budget directly from the government, and the government
is directly linked to the governance of the institutions. While independent
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institutions may derive some funding from the government, the majority of
their funds come from independent sources. In Taiwan, these independent
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sources are often embodied in the wealth of a particular sponsoring family.
Governance of independent institutions is similar to that of U.S. institutions in
that control is vested in self-perpetuating Boards of Trustees. However, these
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boards may be dominated by members and allies of the sponsoring families.

A systematic analysis of the higher educational institutions, especially
private institutions, is needed. A model that will assess the financial health of
independent colleges or universities in Taiwan will contribute to the country's
higher educational development.

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Purpose o f the Study

The purpose of this study is to apply the concept of financial ratio

analysis commonly used in the U.S. to develop a suitable financial ratio
analysis model for the independent higher educational institutions in Taiwan.
This financial ratio analysis model will enable institutional and governmental
leaders to examine the financial health o f the private colleges or universities
nationwide.
A cross-sectional analysis of historical financial data for the independent
higher educational institutions in Taiwan are examined by applying the popular

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concept of financial ratio analysis for higher education in the U.S. The
financial records of 17 independent colleges or universities in Taiwan are
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presented and examined for the years 1988 through 1993. Institutions are
compared across subgroups to determine useful ratios for analysis. In
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particular, this analysis of financial indicators from healthy versus unhealthy
institutions provides benchmarks for financial stability.
The model that is developed for this study provides a methodology for
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existing colleges and universities to self-assess their financial health and to

signal the possibility of financial insolvency. The results can contribute to
developing a monitoring system useful to Taiwan's Ministry of Education
(MOE) and the founders of new colleges.
Building upon the financial ratios commonly used to analyze educational
institutions in the U .S., this study creates a similar set of indicators to monitor
and analyze the financial health of Taiwan's independent colleges and
universities. Each ratio targets a particular financial health factor, so that
overall, the results present an overview o f financial structure, operating

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results, operating contribution and demands, and cred ib ilities o f the selected
institutions.

Research Questions

Higher education is extremely important to Taiwan's continued growth

and development. However, the financial health of higher education
institutions is unknown because no comparative financial analysis model exists
in Taiwan. A systematic analysis of the operating results of these institutions

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is necessary in order to determine financial stability and funding needed.
Accordingly, the research question that guided this study was the
following:
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Is there a suitable analysis model that can measure and forecast the
financial health of independent colleges and universities in Taiwan?
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In order to accomplish this purpose, the following sub-problems were
addressed:
(1) Can financial indicators be found that would assist in determining
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criteria for financial health of independent colleges and universities

in Taiwan?
Strategic indicators are commonly used in all types of organizations to
measure financial health. Such indicators used to measure the financial health
of independent colleges and universities in the U.S. have a long history of
validation and prediction. This study creates a similar set of financial ratio
indicators that can be applied to independent colleges and universities in
Taiwan.

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(2) Is there a suitable financial model that will provide information to

forecast financial health for independent colleges or universities in
Taiwan?
Results o f this study provide a set of indicators that can act as
benchmarks for existing schools. Similarly, the leaders and managers o f
newly founded colleges can set financial targets based on the results o f this
study.
Without periodic examination, the financial health of private colleges and
universities is a black box. A criterion or model is needed to serve as a

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precursor to determining financial stability. It is necessary to understand the
financial problems confronting the institutions in order to understand their
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financial conditions.
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Assumptions. Delimitations, and Limitations of the Study

The design o f this study is based on several assumptions and limitations.

It is important to state and understand these, as they directly impact and affect
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the validity and reliability of the study.

Assumptions
1. It is assumed that Taiwanese independent colleges and universities
are financially comparable due to their common governance,
organizational structure, and missions.
2. It is assumed that all Taiwanese independent colleges and
universities operate using similar financial structures and reporting
procedures, as dictated by the Ministry o f Education.

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3. It is assumed that data collected from the institutions included in this

study are accurate.
4. The general applicability o f financial ratio analysis as developed in
the U.S. to higher education institutions in Taiwan is assumed.

Delimitations
1. This study includes only postsecondary four-year independent
colleges and universities of Taiwan. Public institutions and
independent two-year colleges and universities are not included.
2. Financial data are limited to the years 1988 through 1993.

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3. Independent institutions founded during this period are excluded,
since they cannot provide a full set of data.
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Limitations
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1. Results are based on data collected from institutions. Since the
MOE does not require a very detailed reporting structure in Taiwan,
it is possible that not all figures will be precisely comparable.
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The financial statements o f higher education institutions in Taiwan and in

the U.S. are based on the same accounting principles and standards.
However, the data from Taiwan are significantly inferior to those from the
U.S. with regard to classification and completeness (S. C. Liu, Auditor,
MOE, personal communication, June 16, 1993). The institutions in Taiwan
overall provide a "Balance-sheet" format statement to present the financial
position and an "Income-statement" to show the operational results. By
contrast, the financial statements from the U.S. educational institutions rely on

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fund accounting, which divides the statements into different funds depending
on their usage.
The annual statements include less detailed information than those from
the U .S. (see detailed discussion in Chapter II). Several ratios commonly used
in the U.S. are not applicable in Taiwan since data are not available. This
circumstance suggests that applying the U.S. model to Taiwan directly is
inappropriate. The financial ratio analysis concept, however, can be used as
the basis for a design of a suitable model for colleges and universities in
Taiwan.

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2. Any error in the accounting results submitted by institutions will
impact results. IE
3. There are certain limitations associated with financial ratio analysis
(White, Sondhi, & Fried, 1993). These limitations are discussed in
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greater detail in the Literature Review (Chapter II).
4. Because of the sometimes idiosyncratic nature of financial
accounting in Taiwan, there may be extreme or outlier data points.
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Because it would be impossible to have institutions go back and

recalculate these figures, such data will be noted, but ultimately
excluded from the results of this study.
Furthermore, based on regulations from the MOE, the accounting system
of private colleges and universities is different from that used by the public
institutions. Higher educational institutions in Taiwan are supervised directly
under the central government. A public institution in Taiwan is treated as a
division of the central government. Hence, the accounting system of the
public institutions in Taiwan follows the governmental accounting scheme,

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