International Journal of Banking, Accounting and Finance (15 papers in press)
Working Capital Management, Cash Flow and SMEs Performance
by Godfred Afrifa
Abstract: Purpose The paper presents comprehensive evidence on the relationship between Working Capital Management (WCM) and SMEs performance by taking into consideration the plausible effect of cash flow.
Design/methodology/approach The paper adopts a panel data regression analysis on a sample of 802 British quoted small and medium enterprises listed on the Alternative Investment Market for the period from 2004 to 2013.
Findings The results of the study demonstrate the importance of cash flow on SMEs WCM and performance. According to our findings, WCM has a significantly negative impact on SME performance. However, with available cash flow, we find a significantly positive relationship. Additionally, our evidence revels that cash flow constrained (non-constrained) SMEs are able to enhance their performance through decreased (increased) investment in WCM.
Practical implications Overall, the results demonstrate the importance of cash flow availability on SMEs working capital needs. Our findings suggest that in an event of cash flow unavailability (availability) managers should strive to reduce (increase) the investment in working capital in order to improve performance.
Originality/value This current study incorporates the relevance of cash flow in assessing the association between WCM and firm performance.
Keywords: Working Capital Management; Performance; SMEs; Cash Flow.
Volume Weighted Volatility: Empirical Evidence for a New Realized Volatility Measure
by Chaiyuth Padungsaksawasdi, Robert Daigler
Abstract: We introduce a new conceptually superior realized volatility estimator, volume weighted volatility (VWV), which effectively measures demand-based volatility, rather than only measuring the variability of a price series. We compare VWV to other return- and range-based measures using stock index futures, with our results supporting the empirical uniqueness of VWV. First, regressions show that VWV provides unique information. Second, VWV is (only) weakly associated with other volatility measures for the smallest four volatility quintiles. Third, correlograms illustrate that VWV is less persistent than other measures, leading to more unique volatility values. Finally, VWV most closely approximates the normal distribution.
Keywords: Volatility; Futures; VWAP.
Branch manager characteristics and efficiency during capital controls
by Eleftherios Aggelopoulos
Abstract: This paper investigates the impact of manager characteristics on bank branch efficiency during the capital control period in Greece which is unique for a eurozone member in the post-war era. A unique branch-level data set comprising of specific accounting and personal managerial information of a very representative systemic bank is utilized. A profit-oriented bootstrapped DEA model is applied to the data set covering the period from January 2016 to February 2017. The model, which is run for both the total branch network of the bank under investigation and a homogeneous group of its branches located in Athens, produces consistent efficiency estimates of the branch operating process and provides interesting outcomes. Generally, it is found that education and experience influence profit performance effectively in an important manner. More precisely, university graduate managers outperform on average their colleagues with a secondary education level regardless of the sample used. Moreover, in the case of the homogeneous sample, more experienced managers can tackle adverse crisis effects on branch performance more effectively than inexperienced managers; this is even more applicable to the large branches. In this homogeneous branch framework, management experience can satisfactorily compensate for educational limitations caused by a manager not having higher education qualifications. The findings of the study offer useful directions for an effective branch management policy during turbulent times for the banking sector.
Keywords: efficiency; managers; retail branches; profit bootstrap DEA; capital control.
A contingent claims approach to the determinants of the stock-bond return relationship
by Thanos Verousis, Louisa Chen
Abstract: This paper decomposes two effects on a firms stock and bond returns - the effect of firms future cash flow and the effect of business risk to study the relationship between the returns of stocks and bonds issued by the same firm. Based on the contingent claims option pricing theory, we employ firm-level data and an event study methodology, and generate hypotheses regarding the stock-bond return relationship. We show that, by controlling for firms leverage, firms future cash flow has a simultaneous positive effect on firms stock and bond returns, whereas firms business risk has a decoupling effect on stock and bond returns. In addition, we provide evidence for the flight to quality hypothesis at a firm-specific level. Our findings complement the literature of stock and bond correlation within a theoretical framework.
Keywords: stock-bond relationship; Contingent claims analysis; Option pricing theory; firm performance; business risk.
Intraday realized volatility forecasting and announcements
by Dimitrios Vortelinos, Konstantinos Gkillas (Gillas)
Abstract: This paper examines the importance of macroeconomic announcements, nonlinearity and combining, to realized volatility forecasting in equity -, energy - and commodities - mini-futures markets, by using intraday frequency data. We use three evaluation criteria to detect whether the predictions are more accurate on the out-of-sample announcement days or on the all out-of-sample days. The forecasting evaluation dataset starts from 14 October 2009 to 14 October 2011. The ﬁndings indicate that there are some announcements on which nonlinear and combined models forecast realized
volatility more accurately in announcement days.
Keywords: Forecasting; Macroeconomic announcements; Nonlinearity; Combining; Mini-futures markets.
Evaluation of merger premium and firm performance in Europe
by Matthias Nnadi
Abstract: This paper investigates whether the deal premium affects the performance of the acquiring firms in European mergers and acquisitions (M&As) deals for the period 2000-2013. We find a significant reduction in short-term performance of the acquiring firms after the M&As, reflecting the overpayment hypothesis. Our result also indicates that the negative effect on the performance of the acquiring firms is less pronounced in the long-term. The result confirms the synergy hypothesis and the existence of quadratic relationship between high premium and performance. Our findings are robust as we control for firm and time trends. The findings of our study have implications for companies engaging in acquisitions in Europe.
Keywords: mergers; premiums; performance; acquisition; Europe; returns.
Forecasting Private Sector Bank Deposits in Greece: Determinants for Trend and Shock Effects
by Nikolaos Vlachogiannakis, Anastasios Petropoulos
Abstract: In this work, we employ a Markov regime switching autoregressive model (MS-AR) to project private sector bank deposits for the case of Greece, in which low uncertainty regimes are followed by high uncertainty regimes or vice versa. Essentially, MS-AR models are a well-established method for modeling effectively nonlinear financial time series, which entail non-homogeneous observed data and where the patterns of the entailed temporal dynamics may change over time. Our empirical evidence suggests that such a model has a superior out of sample predictive performance compared to a broadly used time series model. At the same time, our model specification can be employed not only in performing baseline forecasting of the deposit growth rate, but also in modeling volatility shocks in the deposit time series. Essentially, our model can be used as an integrated part of a capital or liquidity stress testing framework by Supervisory, Macroprudential or Monetary Policy authorities, in assessing the resilience of a certain bank or of the whole banking sector.
Keywords: Private Sector Bank Deposits; Regime Switching; Forecasting; Bank Run.
Trade-Off vs Pecking Order Theory: Evidence from Greek firms in a period of Debt Crisis
by Georgios Chatzinas, Simeon Papadopoulos
Abstract: The aim of the present study is to examine which of the two main rival theories of capital structure (Trade Off and Pecking Order theories) better explains the behavior of the Greek firms capital structure during debt crisis. The sample consists of accounting data for one hundred and forty two (142) non-financial listed in Athens Stock Exchange (ASE) firms for a period from 2008 to 2014. Using panel data analysis, three regressions are estimated for three periods: 2008-2014, 2008-2010, and 2011-2014. The statistical analysis: (1) supports that Trade - Off theory better explains the firms capital structure during the total period and the second sub-period, while the combination of Pecking Order theory and Trade Off theory during the first sub-period, (2) indicates that the change of the economic conditions due to the Memorandum of Understanding (MoU), signed between the Greek government and its creditors, and the debt crisis may led the firms to adjust their capital structure, (3) provides evidence that during regular economic conditions, both capital structure theories are applied, while in economic conditions of a severe debt crisis that is accompanied by changes in tax rates, the Trade Off theory is dominant.
Keywords: Capital Structure; Trade – Off theory; Pecking Order theory; debt crisis; Greece.
A Guide to Survival of Momentum in UK Style Portfolios
by Golam Sarwar, Cesario Mateus, Natasa Todorovic
Abstract: In this study we estimate the survival time of momentum in six UK style portfolio returns from October 1980 to June 2014. We utilise the Kaplan-Meier estimator, a non-parametric method that measures the probability that momentum will persist beyond the present month. This probability enables us to compute the average momentum survival time for each of the six style portfolios. Discrepancies between these empirical mean survival times and those implied by theoretical models (Random Walk and ARMA (1, 1)) show that there is scope for profiting from momentum trading. We illustrate this by forming long-only, short-only and long-short trading strategies that exploit positive and negative momentum and their average survival time. These trading strategies yield considerably higher Sharpe ratios than the comparative buy-and-hold strategies at a feasible level of transaction costs. This result is most pronounced for the long/short strategies. Our findings remain robust during the 2007/08 financial crisis and the aftermath, suggesting that Kaplan-Meier estimator is a powerful tool for designing a profitable momentum strategy.
Keywords: Momentum survival; Style portfolios; Kaplan-Meier estimator; Trading strategies.
The Relative Efficiency of the Crude Oil Futures Market: Evidence from India
by Sarveshwar Inani
Abstract: The purpose of this study is to identify the extent of relative efficiency of the futures contracts of crude oil, traded in the multi commodity exchange of India limited. This study examines the price discovery process in the short-run and long-run by using daily data from April 1, 2006 to June 30, 2015. Stationarity and Cointegration tests reveal that spot and futures prices are I(1) and cointegrated. Granger causality test has been employed to examine the short-run price discovery, which shows a bi-directional causality with a dominance of the futures market. Three different information share techniques component share method of Gonzalo and Granger (1995), information share method of Hasbrouck (1995), and modified information share of Lien and Shrestha (2009) have been used to measure the relative efficiency of the spot and futures market in the long-run. These results (short-run and long-run) indicate that the price discovery takes place in the futures market. Relative efficiency and the price discovery have crucial implications for optimal portfolio allocation and forecasting of future spot prices. These findings might be useful for the regulators, government, exchange, and policy makers to form market structure policies and guidelines for the commodity markets in emerging economies.
Keywords: Price Discovery; Relative Efficiency; Vector Error Correction Model; Johansen Cointegration; Information Share; Common Factor Methods; Futures Market; India.
Does money supply growth contain predictive power for stock returns? Evidence and explanation
by David G. McMillan
Abstract: We examine the nature of predictive power of money supply growth for stock returns. An understanding of which will be useful for market practitioners and policy makers given the current lack of consensus. In addition, knowledge of this relation can aid our understanding of the risk and cash flow channels of stock price movement. Using monthly data and considering a range of alternative predictor variables, predictive and forecast time horizons, empirical methodologies and measures of stock returns, we find that money supply growth has a negative predictive relation with stock returns. Rolling window forecasts provide confirmatory out-of-sample evidence for the significance of money supply growth as a predictor variable. The use of both returns and dividend growth predictive regressions, as well as a VAR analysis and predictive regressions for size and book-to-market portfolios suggest that relation operates through a risk channel. Higher money supply leads to improving economic conditions and lower (required) returns.
Keywords: stock returns; money supply; predictability; asset price movement; forecasting.
Revising the turn-of-the-month effect study: why does it fade and reappear? Practical policy implications and thoughts for further research
by Evangelos Vasileiou
Abstract: The purpose of this paper is to examine in detail the turn-of-the-month (TOM) effect and to offer a detailed explanation for the controversial empirical findings that have been documented in the literature. Using data from the US stock market, the results suggest that the TOM effect is significantly influenced by: 1) the definitely-selected TOM time span; 2) the capitalisation; 3) the econometric modelling; 4) the applied mean equation; 5) the examined time period; 6) the financial trend. Moreover, the empirical findings suggest that when the TOM returns are positive and statistically significant, there is a positively growing financial trend, while when the non-turn-of-the-month (NTOM) days are negative and statistically significant coincide with a financial crisis (or negative financial trend). The latter results could pave the way for further TOM studies which would examine whether the TOM period could be an indicator of the upcoming financial conditions.
Keywords: calendar anomalies; turn-of-the-month effect; efficient market hypothesis; US stock market; size effect.
Herding behaviour in a peripheral European stock market: the impact of the subprime and the European sovereign debt crises
by Luís G.G. Dos Santos, Sérgio Lagoa
Abstract: The characteristics of the Portuguese stock market suggest that it is susceptible to herding behaviour. We investigate the existence of this behaviour in Portugal during periods of market stress, with emphasis on the subprime and European sovereign debt crises. We analyse the overall stock market, key industries, and portfolios divided by market capitalisation. The study is performed using both linear and nonlinear models, and the impact of conditional variance is taken into account. This paper shows evidence of herding behaviour when the nonlinear model is used and during periods of crisis. Investors imitate more assets of similar size than assets of the same industry. Finally, the evidence of herding behaviour is reduced when GARCH effects are taken into account.
Keywords: herding behaviour; market stress; Portugal; stock market; crisis; subprime crisis; European sovereign debt crisis.
Social networks in banking: a note on co-authorship in banking research
by Andreas Andrikopoulos, Aristeidis Samitas, Anastasia Lolou
Abstract: We explore social networks of scientific collaboration in banking research. Collaboration is measured with co-authorship partnerships between individual scientists, institutions and countries. We employ a sample of published research in banking journals over the last 25 years and discuss the social structure of collaborations in banking papers. We find the most central authors, institutions and countries in banking research. We also discover that the network of banking research has small-world properties; the collaboration between authors, institutions and countries is highly clustered and most nodes in the network are closely connected.
Keywords: social networks; banking research; small world.
Geographical disclosure quality under IFRS 8: a European Union analysis
by Sameh Kobbi-Fakhfakh
Abstract: In November 2006, the International Financial Reporting Standard 8 (IFRS 8) was issued as a substitute for the International Accounting Standard 14 Revised (IAS 14R) and became effective in 2009. This paper aims to describe and evaluate the quality of geographical disclosure following the adoption of IFRS 8. Our methodology is two-fold. First, a content analysis of the annual reports of 171 publicly listed European Union (EU) companies during the period from 2006 to 2012 shows substantial variation in geographical disclosure practices. Second, a multiple regression analysis shows the negative impact of IFRS 8 on the quality of geographical disclosure measured by two proxies, namely extent and fineness. Our findings, also, suggest that geographical disclosure quality is associated with firm size and that more internationally oriented firms provide finer geographical segments compared to their counterparts.
Keywords: IFRS 8; IAS 14R; geographical disclosure quality; GDQ; aggregation level; materiality threshold; extent of disclosure; firm's characteristics; fineness.