International Journal of Banking, Accounting and Finance (14 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.
Risk, competition and cost efficiency in the Chinese banking industry
by Yong Tan, Christos Floros
Abstract: Using a sample of Chinese commercial banks over the period 2003-2013, this paper tests the interrelationships between credit risk, competition and cost efficiency in the Chinese banking industry under a three-stage least square estimator. The findings suggest that a higher level of competition leads to higher credit risk of Chinese commercial banks and a higher level of efficiency leads to lower credit risk. In addition, it is found that higher level of efficiency results in higher level of competition in the Chinese banking industry and higher levels of credit risk precede an increase in the level of competition. Finally, the results show that Chinese commercial banks with higher levels of credit risk have lower levels of cost efficiency and competition-efficiency hypothesis holds in the Chinese banking industry. The results provide policy implications to the Chinese government and banking regulatory authorities.
Keywords: credit risk; competition; cost efficiency; Chinese banking; three-stage least square.
Time Varying Volatility and Asymmetric News Effect during Financial Crises Evidence from DJIA, S&P 500, NASDAQ and FTSE 100 Indices
by SAMER AL-RJOUB, Husam Azzam
Abstract: We look at historical episodes in the United States over the last one hundred years of major stock market crashes in the Dow Jones industrial average, the S&P 500 and the NASDAQ indices to examine the effect of financial crises on stock returns and the news effect. Our Main results are:
I) Crises affect stock market returns negatively.
II) The monotonic relationship between risk and return is more obvious during crises than without crises.
III) Volatility of stock returns is high during crises
IV) The asymmetric news effect (leverage effect) is negative and statistically different from zero for the three indices in all scenarios.
V) The asymmetric news effect is more obvious for the weekly stocks returns
Based on these results, we believe that people's reaction is homogenous and recurs. Psychological factors affect invertors behavior during crises where panic magnifies the effect of crises and is reflected in the form of increased volatility and overreaction to bad news. In addition we replicate the same tests on the FTSE 100 of UK and results coincide.
Keywords: Crises; Volatility; News Effect; Psychological Factors.
Special Issue on: 2016 Portsmouth – Fordham conference on Banking and Finance Recent developments in Global Financial Markets
The WTI/Brent oil futures price differential and the globalisation-regionalisation hypothesis
by MICHAIL FILIPPIDIS, Renatas Kizys, George Filis, Christos Floros
Abstract: This study examines the globalisation-regionalisation hypothesis in the WTI/Brent crude oil futures price differential by considering a set of the potential determinants at 1, 3 and 6 months to maturity contracts. To this end, we employ monthly data over the period 1994:1-2014:12 for a set of crude oil market specific (convenience yield, consumption, production) and oil futures market specific (open interest, trading volume) determinants. Consistently with the regionalisation hypothesis, our results are as follows. First, the WTI/Brent convenience yield spread can drive a wedge between the WTI and Brent oil futures prices for the 1-month and 3-month contracts. Second, the WTI/Brent oil production spread is a significant determinant for the nearby month to maturity contract, while the WTI/Brent oil consumption spread is significant for the 6-month contract. Third, the WTI/Brent open interest spread appears to influence the oil futures price variability between the WTI and Brent for the 1-month and 3-month contracts, while the WTI/Brent trading volume spread lends predictive power for the 3-month contract. Fourth, our robustness analysis lends support to the above findings. The findings of this study provide valuable information to energy investors, traders and hedgers.
Keywords: Brent; convenience yield; globalisation-regionalisation hypothesis; oil futures differential; WTI.
Reaction of EU stock markets to ECB policy interventions
by Dimitrios Vortelinos, Konstantinos Gkillas (Gillas)
Abstract: This paper investigates the significance and impact of ECB policy
interventions on European stock markets. We conducted an event
study and a regression analysis. Our data is drawn from the stock indices of the
countries of all 28 members of the European Union (Euro
members and non-Euro members). Our dataset begins on 1 January 2001 and
ends on 31 December 2014, for a total of 3,906 trading days. During
the sample period, 394 policy interventions are considered as significant
dates. Our results provide strong evidence in favour of a positive and
statistically significant reaction to most of the ECB's policy interventions.
The most important category of events is the financial sector
Keywords: abnormal returns; policy interventions; event study; financial crisis.