Afro-Asian J. of Finance and Accounting (14 papers in press)
The moderating effect of corporate governance on the relationship between related party transactions and firm value
by Masood Fooladi, Maryam Farhadi
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.
Using VIKOR method to prioritise Sharia-compliant equivalents for short selling: evidence from Irans stock market
by Maysam Ahmadvand, Hossein Tamalloki
Abstract: Short selling is a transaction that clearly violates the general rules of Sharia, so using it in Islamic financial markets has some difficulties. For this reason, financial researchers, along with Islamic scholars, have tried to benefit from the aforementioned instrument for the development of capital markets. In order to take advantage of short selling, particular methods and strategies need to be identified. Islamic clerics have proposed various alternatives for simulating short selling. This paper, by means of the VIKOR method, evaluates and prioritises Sharia-compliant equivalents for short selling, and introduces the most proper approach (approaches) for implementation in Irans stock market.
Keywords: short selling; Salaf; Wa’ad; Murabaha; VIKOR; Iran’s stock market.
Causal relationship between stock prices and gold rate-empirical evidence from India
by Dheyvendhren Bhuvaneshwari, Krishnaraj Ramya
Abstract: The paper investigates the cointegrating and causal relationship between stock prices and gold rates in India. The monthly time series data of stock prices of S&P CNX Nifty and gold rates for the period 2011:01 - 2015:12 are used as the sample data for this study. In this research paper, Augmented Dickey-Fuller and Phillips-Perron unit root tests are applied to test the stationarity of data. Johansens cointegration test and Granger causality test are adopted to examine the cointegrating and causal relationship, respectively, between stock prices and gold rate. From the analysis, non-existence of long-run equilibrium and absence of causal relationship are found between both the variables. Further, it is inferred that stock prices do not influence gold rate and therefore past values of stock prices cannot be used to improve the forecast of future gold rate in India.
Keywords: Indian stock prices; gold rate; unit root tests; Johansen cointegration test; Granger causality test.
The interaction effect of corporate governance and the CAMEL framework on bank performance in Malaysia
by Siti Nurain Muhmad, Hafiza Aishah Hashim
Abstract: This study conducts an analysis of the interaction effect between corporate governance and the CAMEL framework (Capital adequacy, Asset quality, Management competency, Earning quality, Liquidity) towards bank performance in Malaysia. The study highlights the corporate governance as a moderator to the CAMEL framework in enhancing the bank performance. Additionally, to closely examine the interaction effect, the simple slope test is employed in this study to investigate the impact of high and low corporate governance on the CAMEL framework and bank performance. The results indicate that capital adequacy, management competency, earning quality and liquidity have a significant relationship with bank performance when interacting with corporate governance. However, the result of the simple slope test shows that management competency and liquidity has a better interaction with high corporate governance. The outcome of the study should be provide vision to the corporate governance bodies in Malaysia, depositors, investors, stakeholders and also researchers to adopt and increase some knowledge, especially on how corporate governance and the CAMEL framework could improve the bank performance.
Keywords: interaction; corporate governance; CAMEL framework; bank performance.
Determinants of forward-looking disclosure: evidence from the Bahraini capital market
by Gehan Mousa, Elsayed Elamir
Abstract: This study investigates the factors that may affect the extent of corporate forward-looking disclosure in the Bahraini capital market. The study creates a forward- looking disclosure index of 56 items, and applies QDA Miner as a qualitative data analysis software package to measure the amount of forward-looking information disclosed by a sample of Bahraini listed companies in the period 2010-2013. The study employs backward regression analysis, as a unique technique that excludes insignificant variable(s) from the study and suggests the best model with significant variables, to examine the relationship between corporate forward-looking disclosure and five firm characteristics (firm size, financial leverage, sector type, profitability, and liquidity). The backward regression analyses show that financial leverage and firm size are found to be significant; however, sector type, profitability, and liquidity are found to have insignificant association with the level of corporate forward-looking disclosure.
Keywords: corporate disclosure; annual reports; forward-looking information; Bahrain Bourse.
The impacts of institutional characteristics on capital structure: evidence from listed commercial banks in China
by Phassawan Suntraruk, Liu Xiaoxing
Abstract: In China, bank capital structure is subject to the minimum capital requirements regulated by the Basel Accords. Nonetheless, with the rapid development of the Chinese banking sector, institutional characteristics have an impact on how banks finance their operations and growth. Therefore, the purpose of this study is to explore the institutional factors that influence the capital structure of listed commercial banks in China. Using unbalanced panel data of 25 listed Chinese commercial banks during the period from 2003 to 2015, the results indicate that Chinese listed commercial banks with more profitability or those having a low percentage of shares owned by the largest shareholders are less likely to employ debt financing. Moreover, this study shows that the size of Chinese listed commercial banks increases with debts. The results of this study will assist managers of listed commercial banks to create adequate capital structure decision-making to further maximise bank value. In addition, both investors and depositors will be able to judge how safe the bank capital is, after understanding the determinants of capital structure, which will help in reducing their risk exposure.
Keywords: capital Structure; Chinese banks; commercial bank; financing; panel data.
Combinatorial portfolio selection with the ELECTRE III method: a case study of the Stock Exchange of Thailand
by Veera Boonjing, Laor Boongasame
Abstract: Various techniques of portfolio selection are applied to interpret the status of the market and predict the market's future trend, but they are not beneficial to small investors because these techniques should be administered by an expert. In addition, these techniques cannot help investors to compare businesses on ambiguity multi-criteria and require the accumulation of data about the market. Therefore, portfolio selection with two significant financial ratios using the ELECTRE III method is proposed for small investors to make trading decisions. In order to demonstrate the effectiveness of this research, it is compared with the situation where a fix-percentage allocation existed and data was collected from the Stock Exchange of Thailand. Empirical results show that portfolio selection with the ELECTRE III method offers significantly better ranking performance than the fix-percentage allocation method.
Keywords: portfolio selection; ELECTRE III method; Stock Exchange of Thailand; net profit margin; dividend yield; stocks.
The nexus between stock price and foreign exchange rate: validating the portfolio-balance model in Nigeria
by Olufemi Adeyeye, Olufemi Aluko, Oseko Migiro
Abstract: The relationship between stock price and foreign exchange (forex) rate has been a controversial issue over the years. This study examines the nexus between stock prices and forex rates in Nigeria from January 1985 to December 2014. It applies the Johansen cointegration, Toda-Yamamoto Granger non-causality and correlation tests. The empirical results reveal that there is presence of co-integration between stock prices and forex rates and unidirectional causality from forex rates to stock prices with positive correlation. This study did not validate the proposition of the portfolio-balance model in Nigeria but it provides substantiated evidence in favour of the traditional-flow model.
Keywords: stock price; foreign exchange rate; portfolio-balance model; Toda-Yamamoto Granger non-causality test.
Testing dynamic tradeoff theory of capital structure: an empirical study for the textiles industry in India and China
by Dinesh Jaisinghani, Barnali Chaklader
Abstract: The prime objective of the current study is to compare the dynamic behaviour of capital structure across firms operating in the textile industry in India and China. The study has been conducted by analysing 92 publicly listed textiles firms in India and 33 publicly listed textiles firms in China. The time period from 2005 to 2016 for Indian firms and from 2004 to 2015 for the Chinese firms has been considered. The Arellano and Bond (1991) and Blundell and Bond (1998) based dynamic panel estimation techniques have been deployed to generate the results. The empirical results confirm the applicability of the dynamic trade-off theory for the textile industry in India and China. Further, the results show that the speed of adjustment towards the targeted debt level is very low for the Indian textile companies compared with that of the Chinese textile companies. The results strongly convey that Indian firms bear significant costs while moving from their observed leverage to their target leverage. The overall results support partial applicability of dynamic trade-off theory for the Indian firms and strong applicability of the theory for the Chinese firms.
Keywords: capital structure; dynamic trade-off theory; textiles industry; emerging economies; dynamic panel regression; India; China.
An analysis of diversification benefits of commodity futures using Markov regime-switching approach
by Ritika Jaiswal, Rashmi Uchil
Abstract: This study investigates the hedge and safe haven properties of individual commodity futures against stock market movements using a nonlinear regime-switching framework. Based on the results of Brock, Dechert and Scheinkman (BDS) test and information selection criterion, the Markov-Switching Vector Autoregression (MS-VAR) model is applied with three regimes for gold and silver futures and with two regimes for crude oil, copper and zinc futures. The results demonstrate strong hedge and weak safe haven property of gold and silver futures, and show a weak hedge and weak safe haven potential of copper and zinc futures. Conversely, crude oil futures cannot be used as a safe haven against extreme stock market movements. In addition, portfolio analysis confirms that these findings provide significant information to investors for the construction of better risk-adjusted return portfolio.
Keywords: commodity futures; diversification; hedge; Markov switching; nonlinear; MS-VAR; regime switching; safe haven.
Investor sentiment and asset returns: the case of the Indian stock market
by Sachin Mathur, Anupam Rastogi
Abstract: According to behavioural finance theory, investor sentiment can lead to extreme mispricing of stocks. In this paper, we describe the construction of an investor sentiment index for India, an emerging market, to examine the association between sentiment and stock returns. We test whether the sentiment index predicts long term returns of the stock market, as well as of stock portfolios formed on the basis of size and value characteristics, over the sample period of 2004 to 2016. The sentiment index fails to predict broad market returns, but is inversely associated with the subsequent years returns of small low-priced stocks, consistent with constrained arbitrage argument of behavioural finance theory and information uncertainty associated with such stocks.
Keywords: investor sentiment; sentiment index; behavioural finance; stock returns; information uncertainty; emerging market; India.