Afro-Asian J. of Finance and Accounting (14 papers in press)
The four factor model and stock returns: evidence from Sri Lanka
by Amal Peter Abeysekera, Pulukkuttige Don Nimal
Abstract: There have been numerous studies that have attempted to explain the cross-sectional variation in average returns in developed and emerging markets. However, there is a dearth in the published evidence of research that have looked at frontier markets regarding this aspect. Sri Lanka is considered to be a frontier market and hence the objective of this study is to test the ability of the Carhart four-factor model to explain the variation in the cross-section of average stock returns in the Colombo Stock Exchange (CSE) and to evaluate it in comparison to the capital asset pricing model (CAPM) and the Fama and French three-factor model. The study finds that the four-factor model; incorporating the market factor, size factor, value factor and momentum factor provides a satisfactory explanation of the variation in the cross-section of average stock returns in the CSE. Further, it is found that the four-factor model performs better than the CAPM and the three-factor model.
Keywords: Carhart four-factor model; GRS F-test; Colombo Stock Exchange; CSE; frontier markets; momentum; Sri Lanka.
Modelling persistence in conditional volatility of asset returns
by Rajan Pandey, Arya Kumar
Abstract: Studies on volatility forecasting models indicate superior performance of Generalized Autoregressive Conditional Heteroscedasticity (GARCH) type models in the modelling conditional variance of asset returns. The utility of GARCH parameters lies in their ability in explaining the persistence of the conditional variance. The estimate of persistence provides a quantitative measure of the impact of a sudden significant change in the asset return on its future volatility. This study attempts to analyse the magnitude and time-evolving pattern in the persistence of conditional volatility using data on S&P CNX NIFTY 50 (henceforth, Nifty) benchmark index. The GARCH (1, 1) model is fitted on daily returns and a simple iterative scheme is used to re-estimate GARCH parameters on samples of different sizes and different time periods. The GARCH estimates obtained through repeated estimations furnish empirical evidence on the nature and consistency of the persistence parameter. Findings of the study confirm high persistence in the volatility process and indicate a positive relationship between the conditional volatility and volatility persistence.
Keywords: volatility persistence; long memory; conditional volatility; volatility clustering; structural changes; volatility asymmetry
Impact of foreign ownership on capital structure and firm value in emerging markets: the case of Amman Stock Exchange listed firms
by Ahmad Y. Khasawneh, Kareem S. Statyieh
Abstract: This research examines the impact of foreign ownership on capital structure and the impact of foreign ownership on firms value in the non-financial listed companies in Amman Stock Exchange, taking into consideration the effects of the sector to which the firm belongs. Panel datasets are formed and panel data techniques are used. We develop two models using interaction terms to incorporate the sectors effect. We use the Driscoll-Kraay approach to resolve the heteroskedasticity problem of the fixed effect method. The empirical results suggest a significant negative relationship between foreign ownership and all three measurements of capital structure; although foreign ownership has the largest effect on the short-term market leverage relative to both long-term and total market leverage. The sector of the firms matters, and especially when it comes to the impact of the services sector, it is found that the foreign ownership impact is always statistically significant, although it has a lower impact for the industrial firms. A strong significant positive relationship between foreign ownership and firms value is also found, and the sector of the firms is found to be an important variable in the firm's value determination.
Keywords: foreign ownership, capital structure, leverage, firm value, Tobin's Q, Amman Stock Exchange, Driscoll–Kraay, heteroskedasticity modified standard error.
Dynamic relation between Islamic and conventional lending rates in Malaysia
by Siew Peng Lee, Noor Azryani Auzairy, Isa Mansor, Chee-Keong Choong
Abstract: Conceptually, the Islamic and conventional banking rates are supposedly determined based on different premises, and empirical evidence appears to suggest that they are closely related. However, the findings are not unanimous. This paper offers Malaysian evidence of the extent of relatedness between Islamic and conventional lending rates in a dual-banking system. Our data consists of two pairs of Islamic and conventional lending rates: the base lending rates and the average lending rates. To test the relation, we use the standard methodologies of the Johansen cointegration, variance decomposition, impulse response function and Granger causality. Our results indicate that there is no long-term relation between the Islamic and conventional lending rates for base lending rates; however, the average lending rates do indicate a cointegration between them. In the short run, the averages are independent. In general, it may be concluded that Islamic borrowing may be considered a viable alternative to conventional bank borrowing.
Keywords: Islamic banking, Islamic financing rate, conventional lending rate, dual banking system
Working capital management in Chinese firms: an empirical investigation of determinants and adjustment towards a target level using a dynamic panel data model
by Ajid ur Rehman, Man Wang
Abstract: Satisfactory and timely working capital investment policy is a prerequisite for better performance of any firm. Hence, this study analysed not only determinants of working capital investment policy but also the time taken by firms to adjust their working capital management policies, with special reference to Chinese state-owned and non-state-owned enterprises. For this purpose, an extensive dataset of 760 firms, over a period of twelve years (2001-2012), is taken for analysis. For robustness, four models are used to estimate the parameters. The study finds that bigger sized, highly levered and tangible firms invest less in their working capital. Firms with immediate sales growth and asymmetric information invest more in working capital. Board size and board independence are found to have a monitoring role in curtailing working capital investment. Finally, the study highlights an active working capital management policy by Chinese non-state-owned enterprises by reporting a lower adjustment coefficient for non-state Chinese enterprises compared with state-owned enterprises.
Keywords: working capital management, pecking order theory, Chinese firms, firm size, leverage, asymmetric information, two steps GMM
Long-run impact of financial restructuring on capital structure
by Anupam Rastogi, Smita Mazumdar
Abstract: This paper empirically investigates the impact of financial restructuring on capital structure of a firm in India. Pre- and post-admission data of firms subjected to financial restructuring are compared using paired sample t-test. Fixed effect panel regression model is used to analyse 15 year (2000-2014) data of 91 firms subjected to financial restructuring to find the relation between leverage and its determinants profitability, firm size, tangibility and growth opportunity. Empirical results suggest that financial restructuring by itself is not a reason enough for leverage to increase over a period of 15 years. Other factors such as profitability, tangibility, growth opportunity and firm size play important roles as well. The model corroborates the explanation provided by the asymmetric information theory and the signalling hypothesis to explain the capital structure of a firm.
Keywords: India, corporate debt restructuring, capital structure, asymmetric information theory, leverage, signalling hypothesis
Robust value-at-risk forecasting of Karachi Stock Exchange
by Farhat Iqbal
Abstract: A class of robust M-estimators for generalised autoregressive conditional heteroscedastic (GARCH) type models are used for the prediction of Value-at-Risk (VaR) of the Karachi Stock Exchange (KSE). To better understand the impact of the global financial crisis on KSE, the daily stock return data is divided into three sub-periods: the pre-crisis period (03 January 2005 31 December 2007), the crisis period (02 January 2008 30 June 2009), and the post-crisis period (01 July 2009 31 December 2013). Symmetric and asymmetric GARCH models that capture the most common stylised facts about index returns, such as volatility clustering and leverage effect, are fitted to these time periods and in-sample and out-of-sample estimates of VaR are obtained. Our results show that M-estimators provide accurate and reliable estimates of VaR in low and high volatile time. Our findings also show that the asymmetric model provides a better fit than the symmetric model for the KSE.
Keywords: GARCH; M-estimator; volatility; value-at-risk.
Why the risk-adjusted discount rate method is a better method than the certainty equivalent method: a teaching perspective
by Srinivas Nippani
Abstract: One of the more popular methods of risk analysis in capital budgeting is the certainty equivalent method. In this paper, we discuss the major drawbacks of using this method, and strongly argue in favour of the risk-adjusted discount rate method. The calculation of certainty equivalent factors, the use of risk-free rate as the discount rate, the reinvestment rate assumption and the practical problems for multinational corporations for using the certainty equivalent method are discussed. We also discuss the concept of cost of capital and its role in relation to the use of the two methods of risk analysis.
Keywords: capital budgeting; risk analysis; certainty equivalent method; risk-adjusted discount rate method.
Tax planning and payment timing
by Soufiene Assidi, Mohamed Ali Brahim Omri
Abstract: The purpose of this paper is to find out about the arbitration between the payment of tax due and the reinvestment of this amount and to look for the timing in which the reinvestment of tax due is more profitable than tax payment. This research is made in connection between accounting and taxation context and tax system feature. To answer our question we use the Vector Auto Regression (VAR) method, which will enable us to analyse the response functions that determine the time at which the profitability of the investment duties to pay will become higher than the penalties. We use a sample of 37 firms listed over 11 years (2000 to 2010). The result shows that managers are not interested to make tax payments within two years because the return of reinvestments will be negative because of the impact of penalties incurred by the legal system and the importance of tax revenues in the economy and the short-term exploitation. This study can also be the object of replications in other contexts. The findings of this paper contribute to the sparse literature on tax management and could be improved by tax optimisation considerations.
Keywords: tax planning; tax timing; penalty; reinvestment tax.
Money demand and black market exchange rate : a cointegration approach with structural break
by Mouyad Alsamara, Charfeddine Lanouar, Zouhair Mrabet
Abstract: This paper examines different specifications of the money demand function by including both black market exchange rate and oil prices as additional variables in Syria for the period 1990Q1 -2009Q4. In order to test the stability of the proposed money demand function specifications, we apply the cointegration approach with structural breaks. The empirical results provide strong evidence for the existence of a stable long run relationship with shift in the cointegration vector. In particular, we found that 28% of the money demand adjustment, following a short-run shock, occurs in the following period. Moreover, the results show that the two additional variables, black market exchange rate and the oil price, play a vital role in determining the money demand in Syria.
Keywords: money demand; cointegration test; structural break; black market exchange rate.
The moderating effect of corporate governance on the relationship between related party transactions and firm value
by Masood Fooladi
Abstract: A recent critical agency problem arises from the expropriation of shareholders wealth within emerging economies. Prior studies suggest that most expropriation of a firms resources is conducted through the related party transactions (RPTs). Based on the conflict of interest view, related parties opportunistically use their authorities to expropriate firms resources for their own benefits. One important monitoring system to reduce the agency problem is corporate governance (CG) to align the interests of those who control and those who own the residual claims in a firm. The aim of this study is to investigate the moderating effect of CG characteristics on the relationship between RPTs and firm value. This study uses divergence between cash flow and control rights as a new factor that could intensify the negative effect of RPTs. Findings of this study document that board size, CEO duality and divergence between cash flow and control rights can intensify the negative relationship between RPTs and firm value. Findings suggest that related parties having a dominance control on the board of directors can compromise the monitoring role of directors on RPTs. Findings support the necessity for more scrutiny by regulators, policy makers and standard setters to protect the firms wealth by introducing stricter regulations for RPTs and improving CG practices.
Keywords: corporate governance; board of directors; divergence between cash flow and control rights; related party transactions.
Ownership structure and bank risk-taking: empirical evidence from Tunisian banks
by Atiyet Ben Amor Atiyet
Abstract: This paper investigates the impact of ownership structure on bank insolvency risk. Panel data regression analysis is applied to a sample of 18 Tunisian banks during the 20112015 period. The results show that concentrated ownership and state ownership reduce banks risk taking, while the presence of institutional investors and foreign ownership encourages banks to take more risk.
Keywords: ownership structure; bank insolvency risk; concentrated ownership; institutional ownership; foreign ownership; state ownership; panel data.
Pairs trading: is it profitable in the Amman Stock Exchange?
by Dima Alrabadi
Abstract: This study investigates the profitability of pairs trading strategy in the Amman Stock Exchange (ASE) using daily data over the period from 2009 to 2013. Specifically, five pairs of stocks are selected based on three criteria: simple correlation analysis, the closeness measure of Gatev et al (2006), and cointegration analysis. The results indicate that the pairs trading strategy achieves an annual rate of return of 22.5%, which is fully explained by both the capital asset pricing model and the Fama and French (1993) three-factor model. These findings are vital to investors, speculators and academicians.
Keywords: Amman Stock Exchange; arbitrage; closeness; cointegration analysis; investment strategy; pairs trading.
Factors affecting financial instruments disclosure in emerging economies: the case of Jordan.
by Yasean Tahat, Ghassan H. Mardini, David M. Power
Abstract: The current study investigates factors affecting Financial Instruments (FI) disclosure for a sample of Jordanian listed companies (82 firms) over two consecutive years (2013 and 2014). An unweighted disclosure index is used to examine the extent of FI disclosure. In addition, the study employs a number of multiple regression models to examine the determinants of FI disclosure. The findings indicate that the level of FI disclosure provided by the sample firms is relatively low, with only 52% of FI-related items being supplied. In addition, the results illustrate that the level of FI-related disclosure has a statistically positive association with firm size, the audit firm employed and corporate governance attributes. However, the current study fails to document significant associations between FI disclosure and firm industry or ownership structure variables. This research provides a number of insights for policy makers. First, the results of the current study could help the IASB when revisiting FI-related accounting standards to consider an emerging countrys perspective. In addition, it provides some insights to accounting regulators in Jordan about how Jordanian listed firms respond to IFRS 7 requirements.
Keywords: financial instruments; corporate disclosure; corporate governance; Jordan.