Afro-Asian J. of Finance and Accounting (30 papers in press)
Impact of corporate social responsibility on firms performance; evidence from non-financial sector of Pakistan
by Burhan Rasheed, Noman Arshed, Zohair Farooq Malik, Mohyuddin Tahir Mahmood
Abstract: The objective of this study is to examine the impact of Corporate Social Responsibility (CSR) on Firms Performance (FP). It is based on conceptual aspects of CSR and considers how CSR can be measured in order to investigate the FP. The paper is exploratory in its kind because CSR is measured as investment and disclosure in the Pakistani non-financial sector. The empirical results of this study provide evidence of a positive impact of CSR on FP. It is further concluded that firms investing in CSR have good financial performance. This study is a pioneer in Pakistan regarding CSR as investment and disclosure simultaneously, and therefore an addition to existing literature on CSR. This paper provides different new ways to examine CSR, by encouraging a discussion about the importance of corporate social responsibility.
Keywords: corporate social responsibility; firm’s performance; non-financial sector; simultaneous equation model.
Does voluntary greenhouse gas emissions disclosure reduce information asymmetry? Australian evidence
by Zahra Borghei, Philomena Leung, James Guthrie
Abstract: Based on agency theory, this study investigates the consequences of carbon disclosure by non-greenhouse gas registered Australian companies on information asymmetry measures over a period after the introduction of the National Greenhouse and Energy Reporting Act 2007 and before the introduction of the Australian carbon tax. The level of carbon disclosure is scored through the content analysis of the annual reports. The findings support that carbon disclosure is negatively related to information asymmetry measures: the bid-ask spread and stock return volatility, in the year following disclosure. Overall, the research results are consistent with predictions of the agency theory and indicate that companies bear the extra voluntary reporting costs to achieve the perceived benefits of disclosure. The findings should be useful for corporates and stakeholders who are concerned about the value relevance of carbon disclosure in financial markets. For accounting standard setters, it highlights the urgency of carbon reporting guidelines.
Keywords: carbon emission; voluntary disclosure; information asymmetry measures; NGER Act 2007; content analysis; climate change.
Return and volatility spillovers among stock markets: BRICS countries experience
by Pradiptarathi Panda, M. Thiripalraju
Abstract: This study attempts to measure the inter-linkages among stock markets for Brazil, Russia, India, China and South Africa (BRICS). We take daily data of five stock indices for BRICS countries from 26 June 2002 to 31 July 2014 with 2866 observations. We consider IBOVESPA index to represent Brazil stock market, MICEX index to represent Russia stock market, SENSEX to represent India stock market, Shanghai composite index to represent China stock market and FTSE/JSE all shares index as a representative of South Africa stock market. The present study differs from the existing literature in terms of studies for a group of countries and examines the magnitude of spillover in terms of return and volatility across markets for BRICS countries. We first test the stationarity of the data series, then we employ VAR Granger causality test among stock indices to capture price spillover effect and to proceed we employ Exponential Generalised Auto Regressive Conditional Heteroscadasticity (EGARCH) model to capture the volatility spillover effect as well as asymmetric spillover effect. We find that the presence of bidirectional and unidirectional return spillover indicates a close relationship among BRICS countries' stock markets. We depict negative news impacts more on volatility of these countries stock markets. Further, we find diversification does not give any economic value from India, Russia and Brazil stock markets to China stock market. The knowledge of transformation of information from one market to another market helps to develop hedging strategy, finds diversification opportunities and captures the efficiency of the market.
Keywords: spillover; BRICS; EGARCH; Granger causality.
Regulatory institutional quality and long-run primary capital market development: the Nigerian case
by Patrick Eke, Kehinde Adetiloye, Joseph Taiwo
Abstract: The role of the financial regulator is significant in the development of its sector. This paper examines the impact of the Securities and Exchange Commission (SEC) on the development of the Nigerian primary capital market, using Granger-Vector autoregression (VAR) framework for data from 1980 to 2013. The variables considered are market capitalisation, liquidity, financial literacy and regulatory quality. The short-run findings indicate that regulatory quality Granger causes market capitalisation, Transaction cost also predicts market capitalisation and liquidity. Financial literacy predicts capitalisation and liquidity. Market capitalisation responds negatively to regulatory quality long-run impulses, implying that an indifferent regulation could be catastrophic for future primary market development. However, capital issuing responds positively to regulatory quality innovations throughout the period. A priori significant finding is that market capitalisation and liquidity do not drive capital issuing. For policies, the paper recommends regulators to increase campaigns to deepen the understanding of issuers and increase financial literacy, promote the registration of more rating agencies, and reduce transaction costs. Regulators should apply soft listing requirements to encourage more firms to seek funds from primary capital market.
Keywords: Securities and Exchange Commission; primary capital market; impulse response function; financial literacy; Nigeria.
Corporate governance index and firm performance: empirical evidence from Indian banking
by Manmeet Kaur, Madhu Vij
Abstract: The increase in famous global corporate scandals has steadily increased the attention towards the failure of corporate governance practices around the world. Owing to globalisation the quality of Corporate Governance (CG) systems becomes an important factor for a firms survival. The problem is more critical when banks are taken into consideration because of their important role in the economy. The present study examines the various practices of CG for banks in India, using a sample of 39 listed banks in the BSE market as on 31 March 2014. In the study the Corporate Governance Index (CGI) has been constructed for each bank to measure the level of good governance practices implementation and to verify whether the banks performed better with regard to that. The overall CGI is subdivided into seven subindices. The variables of the subindices are based on statutory and non-mandatory requirements given by SEBI (Securities Exchange Board of India) under clause 49 of the listing agreement, Basel Norms, RBI recommendations and Companies Act, 2013. The scores of overall CG index and subindex are analysed using non-parametric Mann Whitney U test. The level of compliance is analysed among public and private banks. OLS regression method has been used to evaluate the relationship between the overall CGI, its subindices and bank performance. The results show that CGI is significantly and positively associated with financial performance of banks measured by return on assets, Tobins Q and economic value added. We conclude that the CG mechanism has an influence on banks' performance and value. There is a need to frame and enforce the Code of Banking Sector Governance by the Indian Banks Association in consultation with Reserve Bank of India. Banks indeed would have a good incentive to voluntarily improve their governance standards as will benefit them in terms of performance.
Keywords: corporate governance index; bank performance; ownership structure; corporate governance.
High-quality auditors vs. high-quality audit: the reality in Oman
by Saeed Baatwah, Zalailah Salleh, Norsiah Ahmad
Abstract: The objective of this study is to explore the unique setting of Oman with respect to audit quality. This study measures the quality of audit by examining whether Big-4 audit firms and industry specialist auditors have a role in improving the quality of the audit. We use data from the companies listed on the Oman capital market between 2006-2013. Using a panel data approach and two measures of audit quality for the purpose of this study, we find that the audit quality of Big-4 audit firms and industry specialist auditors is low because they do not enhance the quality of discretionary accruals and do not have a propensity to issue going-concern audit opinion. We also document that Big-4 audit firms and industry specialist auditors consider that religion and risk factors provide the means for achieving high-quality audit. This paper is different from prior studies because it is the first to comprehensively examine audit quality in a unique setting: the Gulf Cooperation Council (GCC). Furthermore, it extends our understanding of the role of religiosity in audit quality.
Keywords: audit quality; earnings management; going-concern opinion; Big-4 audit firms; industry specialist auditors; Oman.
Why do firms smooth dividends? Empirical evidence from an emerging economy - India
by Nishant Labhane
Abstract: The present study examines the determinants of the dividend smoothing behaviour of 240 sample companies listed on National Stock Exchange (NSE) in India, which have continuous data during the period 1994-95 to 2012-13. The empirical results show that Indian firms have target payout ratios, and adjust to their targets relatively slowly but not as slowly as the firms in the developed markets such as USA, Germany, and France and thus, tend to smooth and stabilise their dividends and rely on long-term target payout ratios while making the dividend payment decisions. The firms having high investment opportunities, low leveraged, riskier, and smaller size tend to smooth their dividends more. As for the macroeconomic factors, the high dividend distribution taxes imposed by the government tend to make the firms smooth their dividends more. Overall, the results support the information asymmetry and agency-based explanations of dividend smoothing.
Keywords: dividends; dividend policy; dividend smoothing; Lintner model; target payout ratio.
Bank capital buffer, bank credit and economic growth: evidence from India
by Aniruddha Durafe, Ankur Jha
Abstract: This paper studies the procyclical behaviour of bank capital and bank credit by investigating the causal relationships among bank capital, bank credit and economic growth in government-owned public sector banks of India. In this study, the Granger causality test, cross correlation function and Pearson correlation test are applied. Also, the augmented Dickey-Fuller test is used to find out the stationarity of time series data. Using bank level data of 322 observations from 23 banks during 2000-2013, the study found that bank capital buffer and tier-1 capital have a tendency to induce procyclicality in bank credit. Further, the study found that there are bi-directional causality and positive correlation between bank credit and economic growth. The result confirms the presence of causal relationships and provides strong evidence for the presence of procyclicality and its associated risk in the economy. The study suggests that banks should maintain adequate bank capital buffer to mitigate the risk associated with the procyclicality. It provides support to the implementation of RBI guidelines on the countercyclical buffer by all banks in India.
Keywords: bank capital; tier-1 capital; bank credit; economic growth rate; procyclicality; causality; countercyclical buffer.
A comparative study of the value relevance of accounting information between financial and non-financial companies listed on the Ghana Stock Exchange
by Der Basil Abeifaa, Masairol Haji Masri, Mohammed Salisu Abubakari
Abstract: We investigate the value relevance of book value, earnings and dividends among financial and non-financial companies listed on the Ghana Stock Exchange from 2005 to 2014. For the sample of non-financial companies, book value and earnings are found to be value relevant. Dividends are value relevant only when earnings are split into dividends and retained earnings. For the sample of financial companies, only dividends and earnings are found to be value relevant. Book value is not value relevant. Largely, accounting information has greater value relevance for the sample of non-financial companies than the sample of financial companies. There is no difference in the explanatory power of the Ohlson (1995) model compared with the two alternative models under investigation. The results have implications for both policy makers and investors.
Keywords: value relevance; accounting information; Ghana Stock Exchange.
An activity-based costing for a university consultancy centre for entrepreneurship
by Natasha Khandakar, Fethi Saidi, Bilal Elsalem
Abstract: The motivation for implementing activity-based costing (ABC) in a service cum academia-oriented remains identical as for other institutions, namely to assign indirect costs to products and services based on activities they require. This study presents and discusses an attempt to develop an ABC stimulation model applicable in an advisory and consultancy unit at Qatar University. To determine the advantages and limitations of costing system, the traditional and ABC methods were compared to analyse and compute the operational costs of the centre, which operates in four main activity centres namely research, training, consultation, and incubation. The study relies on a qualitative research method including data collected from both primary and secondary sources to accumulate data on the identified issues and then implementing these costing methods to the centre. Secondary data was collected by reviewing literature sources, whereas primary data was based a survey conducted with around 30 staff members of the centre, in the form of close-ended questions. The study findings thus revealed that ABC is an appropriate and practical tool that would allow the management of the centre for entrepreneurship to have better insights on their cost elements and efficiently plan the usage of their resources.
Keywords: activity-based costing; centre for entrepreneurship; traditional costing; cost analysis; Qatar University.
Engagement partner attributes and earnings quality: evidence from Borsa Istanbul
by Murat Ocak, Gökberk Can
Abstract: This paper investigates the effects of engagement partners attributes on earnings quality using 725 firm*year observations between 2008 and 2013 from Borsa Istanbul manufacturing industry firms. We use two indicators of earnings quality to test the effects of gender, educational background, experience, and certification from among engagement partners attributes. Our findings emphasise that engagement partners attributes do not have any impact on real activities-based earnings management, but do have an impact on accruals-based earnings management. Female engagement partners have a negative effect on the absolute value of discretionary accruals, especially in negative discretionary accruals. On the other hand, we find that engagement partners with longer experience have negative impact on the absolute and negative discretionary accruals.
Keywords: earnings quality; engagement partner; gender; experience; accruals; real activities; Turkey; emerging markets.
Influence of financial distress on exchange rate exposure: evidence from India
by Krishna Prasad, K.R. Suprabha, Shridev Devji
Abstract: This paper investigates the relationship between exchange rate exposure and level of financial distress. We argue that the exchange rate movements have a greater effect on the value of the firms with higher level of financial distress. The effect of other firm level variables, such as profitability, size of the firm, foreign sales and expenses and liquidity, on exchange rate exposure was also studied. We use Merton's (1974) structural default model to estimate firms distance to default as a proxy for their probability of financial distress. A sample of 387 firms listed in National Stock Exchange (NSE) is studied for a period of 2012-2016. We find that the level of firms exchange rate exposure is significantly positively related to distance to default, indicating that firms that have a greater probability of financial distress are more affected by exchange rate movements.
Keywords: exchange rate exposure; financial distress; distance to default; Merton’s model.
Calendar return seasonality across sectors sizes and styles: evidence from the Indian equity markets
by Subhransu Mohanty
Abstract: As the literature shows, market anomalies in their various forms exist in different markets around the globe. Evidence of seasonality of returns in any form, whether based on time period, such as over specific days, weeks or months, or over size, such as large, medium or small, or over different classifications such style (growth/value/momentum), or across various sectors or triggered by material announcements such as earnings, dividend, etc., are all contradictory to any of the three forms of the Efficient Market Hypothesis (EMH). In this paper, we have made an attempt to find out calendar seasonality of returns in the Indian stock markets. We find that return seasonality exists in the Indian markets across sectors, sizes and styles during a month of the year and during a day of the week. These findings can be attributed to many behavioral aspects of investors and can be used by them in predicting the future returns, or in defining investment strategies in order to benefit from abnormal returns.
Keywords: calendar return seasonality; market anomalies; month-of-the-year effect; day-of-the-week effect; Monday effect; holiday effect; small-firm-in-January effect; tax-loss selling effect; feedback model.
Effect of exchange rate volatility on economic growth in Nigeria from 1986 to 2014
by Oladapo Fapetu, John Adebayo Oloyede
Abstract: This study evaluates the effect of exchange rate volatility on economic growth in Nigeria from 1986 to 2014. It determines the extent and manner to which economic growth responds to exchange rate volatility in Nigeria. The empirical analysis of this study is to determine the degree of volatility of real effective exchange rate using the Generalised Autoregressive Heteroskedasticity (GARCH) model. The study finds that there is high volatility of the real effective exchange rate. It also reveals that the real effective exchange rate is negatively and not significantly related to economic growth. The findings of the study suggest that exchange rate volatility does not have a significant effect on the economic growth in Nigeria. This study recommends that the monetary authority should constantly seek to maintain a stable exchange rate and implement sustainable reforms to increase the depth of the financial sector.
Keywords: exchange rate; volatility; economic growth; GARCH.
Do audit quality, political connection, and institutional ownership increase real earnings management? Evidence from Indonesia
by Yeterina Nugrahanti, Andriana Puspitasari
Abstract: The objectives of this study are to evaluate the influence of audit quality (auditor size and auditor tenure), political connections, and institutional ownership toward real earnings management. In this research, real earnings management was determined by abnormal cash flow from operations. Purposive sampling was conducted and 83 manufacturing companies registered in the Indonesian Stock Exchange during 2010-2014 (415 firm-years) were acquired as the samples. For testing the hypotheses, panel data regression with random effect model was used. The findings showed that auditor size and institutional ownership had a positive influence toward real earnings management, while auditor tenure and political connections did not influence real earnings management. The control variables testing showed that firms leverage and firms loss had negative influence toward real earnings management. On the other hand, cash ratio had a positive effect toward real earnings management.
Keywords: real earnings management; audit quality; auditor size; auditor tenure; political connections; institutional ownership.
Implied volatility in the individual stocks call options market:
evidence from Malaysia
by Muhammad Rizky Prima Sakti, Azhar Mohamad
Abstract: Among options traders, implied volatility is regarded as one of the most important variables for determining profitability in options trading. Implied volatility implies the future underlying stock volatility, and whilst it cannot predict market direction, it can forecast the stocks potential for large fluctuations in the future. Once the implied volatility has been calculated, the traders can estimate how high or low the stock might swing by the options expiration, and this estimation helps traders to make informed trading decisions. In this paper, we examine the information content of the implied volatility of individual stocks call options in the Malaysian stock market. We use a daily dataset for 100 trading days for a period between November 2013 and February 2014. Our findings suggest that, for the Malaysian market, although implied volatility does contain some relevant information about future volatility, it is a less accurate predictor than historical volatility.
Keywords: implied volatility; historical volatility; individual stocks call options; Malaysia.
Board characteristics and firm performance: a study of S&P BSE Sensex in India
by M. Sriram
Abstract: The aim of the study is to empirically examine the influence of board characteristics variables on firms financial performance of S&P BSE Sensex companies during the period 2004-2014. S&P BSE Sensex comprises 30 companies drawn from various sectors, such as software services, banking, auto industry, and pharmaceuticals. These companies are financially sound and well established in the industry they represent. Based on a few criteria, a total of 22 companies were finally selected for the present study. For measuring firms performance, two variables, namely Return on Assets (RoA), which is an accounting-based measure, and Tobins Q, which is a market-based measure, were considered as separate independent variables. Based on the review of earlier studies, four independent variables viz., Board Composition (BC), Board Ownership (BO), Board Size (BS) and CEO duality (CEOD) were selected for the study. Using the accounting-based measure; the study finds that there is significant negative association between BS and BO with regard to the firms performance. The other variables such as CEOD, BS did not have any influence on the financial performance. The study also finds no evidence of association between the independent variables and the market-based measure, Tobins Q. The study concludes that a smaller board size and a smaller ownership of executive and non-executive directors in the equity of firms will lead to improved financial performance.
Keywords: return on assets; Tobin’s Q; board size; board composition; board ownership; CEO duality; S&P BSE Sensex.
Effect of mergers and acquisitions on short-term gain to equity shareholders of acquiring firms in India
by Mayank Joshipura, Manoj Panda
Abstract: This paper examines the effect of mergers and acquisitions announcements on short term gain for the acquiring firms shareholders using an event study method. The study analyses 332 acquiring firms in the post-financial crisis era (2009-2015). We report positive wealth effect leading to and on announcement. The effect reverses subsequently. Positive abnormal return leading to announcement indicates leakage of information before the formal announcement. Results of this study are consistent with similar other studies in developed as well as emerging markets.
Keywords: mergers and acquisitions; event study; market efficiency.
Bank loan loss provisions, risk-taking and bank intangibles
by Peterson Ozili
Abstract: This paper examines the relationship between discretionary loan loss provisions and bank intangibles among African banks. Prior studies focus on how intangible assets affect firms profitability and valuation. Beyond these studies, we investigate whether bank managers increase (decrease) bank provisions in response to risk associated with investment in intangible assets. We find that discretionary loan loss provision is inversely associated with bank intangible assets and change in intangible assets, but the inverse association is weakened in environments with strong investor protection. Also, banks appear to use discretionary provisions to smooth earnings when they have low intangible assets, but this behaviour is less pronounced in environments with strong minority shareholders' rights protection. Finally, banks do not appear to use discretionary provisions to smooth earnings when they have substantial or high intangible assets.
Keywords: banks; income smoothing; financial reporting; intangible assets; loan loss provisions; signalling; bank valuation; bank risk-taking; Africa.
Examining bank-specific determinants of the dividend payout ratio of sub-Sharan Africa banks: the panel GMM approach
by Odunayo Olarewaju, Stephen Migiro, Mabutho Sibanda
Abstract: The dividend payout policy of banks has been the commonest dividend policy in commercial banks world-wide owing to the assumption that it will minimise agency costs in the banks. Hence, this study adopts the dynamic panel two-step system and differenced GMM in analysing the data of 250 commercial banks from 30 countries in sub-Saharan Africa (SSA) for the period 2006 to 2015 to examine the determinants of the dividend payout ratio of these banks. The empirical results reveal that the past year's dividend is the most significant determinant of the current year's dividend. Taxation and capital adequacy ratio, which are the legal and regulatory factors considered, are found to be insignificant. Our findings reveal earnings-after-tax and leverage as being significant determinants of payout ratio in SSA banks. Hence, Lintners model holds in SSA banks as a region, and it is, therefore, recommended that it must be strictly followed in setting the dividend process of commercial banks in SSA.
Keywords: system GMM; differenced GMM; Lintner model; payout policy; agency cost; capital adequacy.
The influence of tax manipulation on financial performance: evidence from Bangladesh
by Nabila Nisha, Afrin Rifat
Abstract: Many firms in developing countries are known to report higher book income to shareholders and lower taxable income to taxation authorities in the same reporting period. Generally, this gap between financial and taxable income suggests that firms are taking advantage of book-tax differences for avoiding tax payments. However, such tax manipulations can often affect firms financial performances. This study therefore aims to analyse the empirical relationships between book-tax differences and tax manipulations, and their overall impact upon firms financial performances. A sample of 111 companies listed on Dhaka Stock Exchange (DSE) is analysed to conduct this study using linear panel regressions. Findings indicate that firms disclose different tax information to taxation authorities compared to stakeholders in order to manage earnings and avoid taxes in Bangladesh. Moreover, firms use tax shelters to escape from tax payments and report a good financial picture, thereby confirming that tax manipulations influence firms financial performances.
Keywords: book-tax differences; tax manipulation; earnings management; tax shelter; financial performance; Bangladesh.
The impact of large ownership on capital structure of Vietnamese listed firms
by An Thai, Tri M. Hoang
Abstract: This paper is designed to explore the determinants of the capital structure of Vietnamese listed companies, with an emphasis on large ownership, based on an updated data sample of 261 firms listed on Ho Chi Minh stock exchange during the period from 2007 to 2014. Using several estimators, including pooled ordinary least squares, random effects, fixed effects and fixed effects regression with clusters, our empirical results demonstrate that the proportion of block investment is negatively associated with short-term, total book and market leverage. There is no evidence about the non-linear relationship between large ownership and the capital structure of the observed firms.
Keywords: large ownership; blockholders; capital structure; Vietnam.
Institutional ownership and corporate governance: evidence from Bahrain
by Abdalmuttaleb M.A. Musleh Al-Sartawi, Zakeya Sanad
Abstract: This study aims to investigate the relationship between institutional ownership and the level of corporate governance in the Kingdom of Bahrain. A multi-regression analysis model was used in to investigate the relationship between corporate governance and institutional ownership. Additionally, certain firm characteristics were controlled to study the influence of institutional investment on governance. The results indicated that there is a significant negative relationship between institutional ownership and the level of corporate governance. The researchers assumed that governance of firms may take a number of forms that would decrease the need to improve other corporate governance mechanisms as a result. This study offers recommendations to various stakeholders, whereby companies should hire external auditors that are from the Big4, because they would encourage and contribute in increasing the level corporate governance. Furthermore, workshops and training courses should be conducted in order to increase the awareness of the corporate governance code in Bahrain.
Keywords: institutional ownership; corporate governance; Kingdom of Bahrain.
Nonlinear association between controlling shareholders and leverage: evidence from Jordan
by Buthiena Kharabsheh, Mishiel Suwaidan, Ramadan Elfaitouri
Abstract: This paper investigates the relationship between controlling shareholders ownership, identity and financial leverage. A sample of 60 industrial firms listed on Amman Stock Exchange over the period of 2010 to 2015 is empirically tested. Using a dynamic estimator to control for all endogeneity types, our results support an inverted U-shape relationship between controlling shareholders and financial leverage. Controlling shareholders rely more on debt at low levels of ownership to maintain control. However, they rely less on debt, which is found in this study to be 53%, to avoid financial distress. These results provide support for the trade-off theory. Our findings also reveal that family firms have higher leverage ratios than non-family firms. Further, institutional shareholders negatively affect financial leverage, thus assuming a substitution role.
Keywords: controlling shareholders; financial leverage; corporate governance; family firms; capital structure; ownership structure; Jordan.
The interrelation between the Baltic Dry Index, a practical economic indicator and emerging stock market indices
by M. Manoharan, S. Visalakshmi
Abstract: The Baltic Dry Index (BDI) is a leading indicator that generates a vibrant panorama on the global demand for commodities and raw materials as it provides a glimpse into the future. This study uses the analytical content of the BDI to explore the relationship between maritime markets and stock markets with respect to emerging stock market indices of India and China (i.e., Nifty and Shanghai Composite Index) using VAR SURE modelling, impulse response and VAR Granger causality test for the period 1 January 2011 to 31 December 2015. The overall results exhibit that BDI influences Nifty marginally and also produces a slight impact on SSE Composite Index owing to the influence of the international economic environment, particularly by the international trades. The resulting model will aid investors and decision makers to make their financial conclusions more precisely.
Keywords: Baltic Dry Index; Nifty; Shanghai Composite Index; maritime market; stock market; VAR SURE modelling.
The impact of bank capital on profitability and risk in GCC countries: Islamic vs. conventional banks
by Ibrahim Fatnassi, Habib Hasnaoui
Abstract: This study analyses how capital influences profitability and risk in the context of Islamic and conventional banking in Gulf Cooperation Council (GCC) countries. It achieves this through structure-conduct-performance, moral hazard, and regulatory hypotheses. We apply the generalised method of moments (GMM) technique for dynamic panels using bank-level data from 85 banks for the 20032011 period. We first found that highly capitalised Islamic banks generate low returns, while in contrast, highly capitalised conventional banks generate high returns. Secondly, we found highly capitalised GCC banks (both Islamic and conventional) to be characterised by greater risk. Additionally, all profitability and risk variables demonstrate persistence. We then ultimately arrive at the same conclusions about capital, profitability, and risk relationship with the introduction of regulatory variables.
Keywords: bank capital; profitability; risk; Islamic finance; dynamic panel; financial regulation.
Pricing efficiency of exchange traded funds tracking the Gulf Cooperation Countries
by Fahad Almudhaf
Abstract: This paper analyses the pricing efficiency of Exchange Traded Funds (ETFs) as measured by the level and persistence of the deviation between market prices and net asset value (NAV). Studying ETFs tracking in the unexplored Gulf Cooperation Countries (GCC), we find that Saudi Arabia exhibits the largest dollar premium, of $0.41, on average. On the other hand, the UAE trades at an average discount of $0.06. In addition, deviations (premiums or discounts) persist for as long as four days in Kuwait, while they disappear after one day in Saudi Arabia and Qatar. These empirical findings show that ETFs do not fully replicate the performance of their respective underlying benchmarks. Pricing inefficiencies exist in ETFs with significant tracking errors. Moreover, there is a positive and significant relationship between returns and contemporaneous premiums, while returns and lagged premiums are negatively related. This casts doubt on the efficient market hypothesis. Using Vector Error Correction Model (VECM), we find evidence of significant price discovery in ETFs. Our results contribute to better understanding of ETFs tracking the performance of GCC markets.
Keywords: pricing efficiency; tracking error; exchange traded funds; Qatar stock; UAE stock; Saudi Arabia stock; iShares.
The determinants of capital structure: the Levant versus Gulf Cooperation Council firms
by Fadi Alasfour, Firas Dahmash
Abstract: This paper investigates how firms operating in the Levant economies (Jordan) and the Gulf Cooperation Council economies (Bahrain) determine their capital structure. Using unbalanced panel data and multiple regressions, the paper finds that the leverage ratio is positively affected by the size of the firm, but declines with an increase in firms profitability, the tangibility of assets, and firms liquidity in both types of economy. The leverage ratio is also affected by the market conditions in which the firm operates. The degree and effectiveness of these determinants are dependent on the country's legal and financial traditions. Overall, the capital structure of a firm is heavily influenced by the economic environment and its institutions, corporate governance practices, tax systems, the borrower-lender relation, exposure to capital markets, and the level of investor protection in the country in which the firm operates.
Keywords: capital structure; Levant economies; Gulf Cooperation Council economies; emerging markets; Middle East countries.
Corporate governance, disclosure and firm performance: empirical findings from Malaysia
by Nik Mohamad Zaki, Lee-Lee Chong, Prem Lal Joshi, Shaista Wasiuzamman
Abstract: This study examines the effect of corporate governance, disclosure and firm characteristics on firm performance by taking data from the 2013 financial year annual reports of top listed companies in Malaysia. Using multiple regression analysis, this study finds that the effect on firm performance, namely ROA, ROE and Tobins Q, is different. Board size, the percentage of independent directors on the board and percentage of ownership concentration in firms have a significantly negative relationship with ROA. ROE shows a significant negative association with board size, AC independence and ownership concentration. Tobins Q only shows a significant negative relationship with board size. The findings in this study contribute to the literature that good corporate governance characteristics, appropriate disclosure of corporate governance information and firm characteristics have improved the performance of listed companies in Malaysia. The study also suggests directions for future research.
Keywords: firm performance; ROI; ROE; Tobin Q; board size; ownership concentration; corporate governance; disclosure.
Stock market behaviour: efficient or adaptive? Evidence from the Pakistan stock exchange
by Muhammad Shahid, Semei Coronado, Abdul Sattar
Abstract: The study empirically investigates the Adaptive Market Hypothesis (AMH) in the Pakistan stock market over the period of 1992 to 2015. Daily data of returns (KSE-100) is divided into eight subsamples of equal length of three years each and into different market conditions, and are subjected to linear/nonlinear tests to elucidate how market efficiency has behaved over time and whether a relationship exists between market conditions and levels of return predictability. The tests reveal that returns have gone through periods of dependence and independence over eight subsamples, thus the Pakistan stock exchange is an adaptive market and consistent with the AMH. Furthermore, certain market conditions are more conducive to the predictability of returns as market conditions have also gone through episodes of significant dependence and independence of return predictability, which is also consistent with the AMH. Therefore, the overall results of the study suggest that AMH elucidates the behaviour of stock returns better than the conventional efficient market hypothesis.
Keywords: adaptive market hypothesis; efficient market hypothesis; market conditions; linear dependence; nonlinear dependence.