Afro-Asian J. of Finance and Accounting (8 papers in press)
- Thw association between disclosure level and cost of capital in an emerging market: evidence from Egypt
by Hany Kamel, Tamer Shahwan
Abstract: This paper aims to empirically investigate whether the cost of equity and debt capital are related to the extent of voluntary disclosure in the Egyptian stock market. Following the previous research, a disclosure index relevant to the Egyptian environment was developed and applied in OLS regressions, using information provided in the annual reports of 73 Egyptian listed companies. The results, however, indicate that there is no significant association between the level of voluntary disclosure, on the one hand, and the cost of equity capital and debt capital, on the other. This implies that Egyptian companies do not benefit from extensive voluntary disclosure in reducing the cost of equity or debt capital. Hence, the findings of this paper may be of interest to those academic researchers, practitioners and regulators who are interested in discovering the implications of extensive voluntary disclosure in the annual reports of an emerging market such as Egypt.
Keywords: voluntary disclosure; cost of capital; emerging markets; Egypt.
- Does lack of timeliness explain low contemporaneous returns-earnings association?
by Elleuch Trabelsi Jaouida
Abstract: This paper empirically tests whether the low contemporaneous returns-earnings association set by previous empirical researches may be explained by lack of timeliness of accounting numbers. It hypothesises that if the criteria for accounting recognition yield a multi-period lag in earnings recognitions of economic events, and if these events affect an informed market immediately when they occur, then future periods earnings would have explanatory power for current returns as well as current earnings. To assess the significance of future earnings as an explanatory variable for stock returns, we regress at the first step annual returns on current earnings and, at the second step, annual returns on current earnings and successively the next period's and the next two periods earnings. Results show that future earnings continue to explain current returns. The evidence is characteristic of a substantial recognition lag in earnings that extends to the immediate next period. However, over one year, earnings do not seem to reflect any relevant economic event impounded in security prices at the previous period. The earnings recognition lag seems to decrease after one year.
Keywords: value-relevance, accounting earnings, timeliness.
- Assessing the cost of deposit insurance and moral hazard effect: evidence from the banking sector in Sudan
by Ibrahim . Onour
Abstract: The purpose of this paper is to evaluate the cost of deposit insurance premium and assess moral hazard behaviour in the banking sector in Sudan. The analysis of moral hazard in this paper is based on two types of risk, credit risk and technical efficiency risk (managerial efficiency). The findings of the paper indicate that credit risk is positively associated with deposit insurance coverage, and technical efficiency performance is negatively associated with deposit insurance coverage. It is also indicated that the risk-based insurance premium is less than the fixed rate insurance premium (over-priced) for banks with pure technical efficiency performance. These results imply that, when banks characterised with managerial inefficiency, the deposit insurance system can incite moral hazard behaviour. An additional finding of the paper indicates that, when the banking sector is classified into national, foreign, and mixed ownership classifications, the risk-based average deposit insurance premium is close to the estimated average credit risk in each group.
Keywords: deposit insurance, moral hazard, risk, Sudan
- Does income moderate between risk aversion, information search behaviour and risky decision-making behaviour of investors? A case from Pakistan
by Hifza Rana, Saqib Murtaza, Fareeha Noor, Kashif ur Rehman
Abstract: The purpose of this study is to analyse whether income moderates between risk aversion and the investors preferences for risky investments. This research study extends the behavioral aspect to discuss the risk aversion attitude of investors in Pakistan. A survey instrument (i.e. questionnaire) was distributed among the individual investors of three major cities of Pakistan (Karachi, Lahore and Islamabad). Investors were selected based on their experience in trading stocks, futures, mutual funds and options. After obtaining 303 successful responses of investors, the hypotheses were examined in two steps. First, the moderating effect of income was examined through multi-group moderation analysis. Second, the direct effect of risk aversion on risky decision-making behavior was examined through multiple regression analysis. Income was found to have a significant moderating effect on risky decision-making behaviour, supporting the hypotheses. Contrary to our assumption, income was positively correlated with risk aversion and risky decision-making behaviour. On the other side, risk aversion was found to have a significant but positive effect on the investors willingness to purchase risky assets. Income did not have a significant moderating effect on digital information and risky decision-making behaviour. This research study contributes in expanding the understanding of information search behaviour. It also helps in identifying the consequences of risk aversion on investors' risky decision-making behaviour in the presence of moderator, i.e. income level.
Keywords: risky decision-making behaviour, risk aversion, income, advice-seeking information, digital information, heuristics, demographic characteristics, accounting information, Pakistan.
- How do investors' subscription rate and pattern affect underpricing? An empirical investigation for Indian IPOs
by Seshadev Sahoo
Abstract: This study investigates subscription rates across institutional and non-institutional retail investors for 149 initial public offerings listed in the Indian stock market. We document a positive relationship between underpricing and subscription rate of all investor groups. We also find a significant shift in response pattern across institutional and non-institutional retail investors towards underpriced and overpriced IPOs. Our results support the information asymmetry argument, suggesting that informed investors (institutional investors) are heavily subscribing for underpriced IPOs and shy away from overpriced issues. Cross-sectional regression results indicate that institutional investors' subscription rate is statistically significant (and positive) while evaluating retail investors response rate. This evidence strongly suggests that retail investors sequentially learn from more sophisticated and informed (institutional) investors while applying for IPOs. Further, it is found that non-institutional retail investors heavily subscribe for IPOs from matured firms having long operational history. Empirical results confirm that larger offers and IPOs having more post-issue promoter group retention are more underpriced.
Keywords: underpricing, institutional investor, non-institutional investor, retail investor, offer size, initial return, age, ex-ante, post-issue promoter group holding.
- Excessive CEO compensation and performance in family French firms
by Rim Ben Hassen
Abstract: The purpose of this paper is to examine the effects of CEO compensation on firm performance of French family firms. To investigate the link between executive pay and firm performance, we used multiple regression method over a period of four years (2007 to 2010). Our results show that French family companies provide excessive compensation compared with their non-family counterparts, suggesting that families are likely to extract private benefits at the expense of minority shareholders. The findings also show that excess remuneration paid to executives has a negative impact on financial performance. This result confirms the preceding one and suggests that CEO compensation is used by families as a tunnelling mechanism that exacerbates agency costs.
Keywords: excessive compensation, corporate governance, performance, family French firms.
- Profitable trading strategies based on price multiple information: evidence from India
by Sanjay Sehgal, Asheesh Pandey
Abstract: This paper examines whether price multiples information can be used to develop profitable trading strategies. Data is employed for BSE 500 companies in India from July 2001 to April 2013. We find that, in general, low P/E, P/B and P/S stocks outperform high P/E, P/B and P/S stocks. Based on standalone price multiples, a low P/B stock portfolio provides the highest return of 2.4% per month on a risk-adjusted basis. It is observed that a combination of price multiples and their key value drivers does not provide trading strategies that outperform those based on standalone price multiples. Standard risk models such as the Capital Asset Pricing Model (CAPM) and the FamaFrench model are not able to explain the cross-section of returns for price multiple sorted portfolios. These findings are pertinent for market regulators, investment analysts and academia. The study contributes to the equity valuation and asset pricing literature for emerging markets.
Keywords: relative valuation, price earning multiple, price to book value ratio, net profit margin, return on equity
- Performance measurement link between the balanced scorecard dimensions: an empirical study of the manufacturing sector in Malaysia
by Prem Lal Joshi, Anbalagan Krishnan, Ramaswamy Ravindran
Abstract: In todays competitive business environment, firms are emphasising the use of an integrated performance system consisting of both financial and non-financial measures. This integrated performance measurement system strategically evaluates the performance of the firm in many aspects. The integrated performance measures are necessary to improve the organisational outcomes, whereby it enhances the decision making process by ensuring that relevant information is available. The literature discussion provides sufficient evidence that the improvement of the firms financial position depends on non-financial measures. The causal link between non-financial outcome to the financial outcome adds value in all aspects of organisation performance. There are few studies in the Western context that highlight the causal relationship between the financial and non-financial performance; also, empirical research seems to be still be lacking in the Malaysian business environment. Therefore, this study explores the causal association between the financial and non-financial measures in the context of the Malaysian business environment. This study uses Structural Equation Modelling (SEM), which is a superior research tool to measure the causal relationship between the financial and non-financial performance measures in comparison with other multivariate techniques. The selection of Malaysian business sectors is mainly motivated by different natures of business. The culture of the Malaysian business operations is different from the Western business context, where the emphasis of non financial dimension is greater. In the context of the Malaysian business environment the financial motive is still prominent, as compared to the non-financial aspects. But due to globalization, the financial motive perception is gradually replaced by the emphasis of both financial and non-financial aspects. This study has proved that the manufacturing firms in Malaysia emphasise both dimensions as, statistically evidenced through the link between the BSC dimensions.
Keywords: causal relationship, financial and non-financial performance measures; traditional measurement system.