International Journal of Banking, Accounting and Finance (23 papers in press)
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.
Leverage and investment: A view of prominent role of state ownership
by Duc Nam Phung, Thi Phuong Thao Hoang
Abstract: The study investigates the relationship between leverage and investment in the presence of state ownership in an emerging market. The paper finds that leverage is negatively correlated to corporate investment. This negative relationship is different among firms with different growth opportunities in which the negative relation is significantly larger for low growth companies than high growth ones. Furthermore, when the role of state ownership at both bank and firm levels is taken into account, we find that state ownership tends to attenuate the negative relationship between leverage and investment. The results imply a biased and less-constrained lending policy of a banking system wherein state-owned banks dominate. This bias, in turn, causes over-and-inefficient investments in state-owned firms.
Keywords: Corporate Governance; Leverage; Investment; State Ownership.
Stock Market Predictability 2000-2014: the effect of the Great Recession
by Nektarios Michail
Abstract: The return predictability of 242 companies with continuous daily trading in the Standard and Poors index during the 2000-2014 period is examined using rolling variance ratio tests. The results indicate that predictability is time-varying and stock-specific, a finding which is in accordance to the Adaptive Market Hypothesis. During the Great Recession the number of stocks whose returns were found to be predictable increased substantially, especially during the period of Lehman Brothers bankruptcy. Importantly, predictability is found to be driven by changing market conditions, such as stock market volatility and economic fundamentals.
Keywords: stock market predictability; adaptive markets; Great Recession; mean reversion.
Securitization, Loan Specialization and Bank Risk
by Kenneth A. Tah
Abstract: This study examines the effect of securitization on the loan portfolio, investigating its impact on bank loan specialization. Using U.S. bank holding company data from 2001: Q2 to 2014: Q1, I find a positive relation between securitization and bank loan specialization, driven primarily by securitized mortgages. This study in addition examines securitizations effect on the negative relationship (as observed in previous studies) between loan specialization and bank risk, finding that within the period of our studies, securitization weakens that relationship. Such results suggest that within the focus period of this study, mortgage backed securitization in particular resulted in an overall specialization of credit, in ways that weakens the risk benefit associated with loan specialization.
Keywords: Securitization; loan specialization; bank risk; bank holding company; mortgage backed securitization.
Basel 3.5 vs Basel III A radical overhaul of the Capital Requirements Pillar The case of commodity exposures
by Adrian Rossignolo
Abstract: Following the implementation of Basel III, the Basel Committee has embarked on a thorough review of its market risk directives and enacted new proposals generically called Basel 3.5. They involve a radical transformation of the Standardised Approach (SA) into a risk-sensitive method and a complete overhaul of the Internal Models Approach (IMA) through the replacement of VaR for ES, amid stringent validation standards. rnThe study analyses Basels recent regulations for commodities exposures, finding a substantial rise in capital levels for SA and IMA and the relatively disadvantageous position in which IMA is placed, arising from the higher SAs capital requirements and the tougher evaluation criteria only attained by schemes featuring Extremes Theory. This, in turn, provokes accuracy disincentives and unnecessary immobilisation of funds.rnConsequently, the paper introduces a straightforward solution designed to level SA and IMA and provide substantial protection against huge market slumps with more reasonable capital levels and reduced implied costs.rn
Keywords: Basel 3.5; Basel III; Standardised Approach; Internal Models Approach; Expected Shortfall; Extreme Value Theory.
Pricing Partial-Average Asian Options with the Binomial Method
by Erwinna Chendra, Kuntjoro Adji Sidarto, Muhammad Syamsuddin, Dila Puspita
Abstract: An Asian option is path-dependent derivatives whose payoff depends on the average of the underlying asset price over a certain pre-specified period of time. There is no simple closed-form solution for arithmetic Asian option hence the development of efficient and accurate numerical methods has become critical. In this paper, a modified binomial method is presented for pricing a more common arithmetic Asian option, by averaging the asset between two time periods in the life span of the option. This option is called the partial-average Asian option. Subsequently, the
representative averages are used instead of the actual ones for pricing the option. The set of representative averages is constructed first by determining the maximum and the minimum averages, where other averages are calculated by dividing equally the distance between the maximum and the minimum averages. For Asian option with average strike, if the distance between two time periods is widened by shifting the second time period to the right then the price becomes lower. But if the distance is widened by shifting the first time period to the left then the price becomes higher. The algorithm is not only simple but also easy to implement.
Keywords: Asian option; partial-average; binomial method.
Cash flow sensitivities and bank-finance shocks in nonlisted firms
by Charlotte Ostergaard, Amir Sasson, Bent E. Sørensen
Abstract: We study how small firms manage cash flows by estimating cash flow sensitivities for all sources and uses of cash. Our data are Norwegian nonlisted firms which can be matched to the banks they borrow from. Firms with low cash holdings mainly use external finance to offset cash flow fluctuations over the cycle, whereas firms with high cash holdings rely mainly on internal finance. Estimating how cash flow sensitivities change with exogenous bank shocks, we find that the cyclicality of cash-poor firms' investment is amplified because they do not substitute internal for external finance. Our results imply that for small firms, the transmission of financial shocks to the real economy is closely tied to their accumulation of cash.
Keywords: Cash Holdings; Cash Management; SMEs; Cash Flow Sensitivity; Bank Lending Channel.
The Earnings Announcements Consequences in Public Family Firms
by Elisabete Simões Vieira
Abstract: This paper investigates the market reaction to earnings announcements in public family firms, seeing whether these announcements affect firms return, liquidity and cost of capital. We analyse a sample of Portuguese listed firms for the period 2000-2013, using the event study and a panel data approach. Overall, we find no support for the earnings signalling and the efficient market hypotheses. We find no significant differences between family and non-family firms in what concerns performance. Firms size and age contribute positively to the firms performance. Finally, we find no significant relationship between earnings changes and firms liquidity and weighted average cost of capital, giving no support for the pecking order theory. This study is of interest to scholars and practitioners in the finance field, namely the information content of earnings and the differences between listed family and non-family firms in what concerns the earnings announcements effects.
Keywords: earnings announcements; return; liquidity; cost of capital; family firms.
Actively versus Passively Managed Equity ETFs: New Empirical Insights
by GERASIMOS ROMPOTIS
Abstract: This study employs a sample of 37 active and passive ETF pairs investing in common equity stocks to assess their performance and risk up to December 31, 2016. Several return metrics are computed such as absolute, buy-and-hold returns and risk-adjusted returns. Moreover, cross-sectional regression analysis is applied trying to identify the factors that may influence the performance of ETFs. Finally, the ability of managers to time the market is examined. The findings are similar to those in the previous literature. Active ETFs fall short in terms of performance and overall risk when compared their passive counterparts also failing to deliver any material excess-market return. In addition, active ETF managers are lacking in superior market timing skills. Finally, the performance of ETFs is found to be related with expenses and volume in a negative fashion while a positive relationship is revealed between performance and the assets invested in ETFs.
Keywords: ETFs; Active Management; Performance; Market Timing; Expenses.
The propensity to pay dividends: empirical evidence from the MENA region
by Panagiotis Andrikopoulos, Osama El-Ansary, Walid Ibrahim Hassan
Abstract: This paper investigates the relation between stock market sentiment and firms propensity to pay dividends in the MENA region for the period 2000- 2015. Using conventional determinants of cash distributions as control variables, our results show that the tendency to pay dividends is negatively related to the aggregate investors sentiment but positively related to the dividend premium. Unlike prior literature, we report no association between firms dividend policy and issues of stock market liquidity. Overall, we suggest that corporate payout policies in the case of the MENA region can best be explained by the dividend catering hypothesis.
Keywords: Dividends; payout policy; sentiment index; market volatility.
Working Capital Management and Financial Performance of UK Listed Firms: A Contingency Approach
by Ishmael Tingbani
Abstract: Existing empirical research findings generally suggest that working capital management (WCM) affects and the firms financial performance. This paper adopts contingency theory framework to investigate how the relationship between WCM and financial performance is affected by the firms environment, resources and management capability. Our sample consist of an unbalanced panel of 802 firms listed on the London Stock Exchange (LSE) from 2004 to 2014 on which a dynamic panel data analysis was performed using a series of interactive models to estimate the relationship. The findings suggest that the impact of WCM on financial performance changes to reflect number contingency variables such as environmental, resources and management capabilities of the firm. These findings are significant because they demonstrate for the first time how the firms ability to enhance performance through investment in working capital is influenced by contingent factors such as environmental, resource and management capabilities of the firm. Our results are also important as they show that contingency theory helps to provide an understanding on the conditions under which investment in working capital can be an effective tool in enhancing financial performance and the relevant contingencies.
Keywords: Working Capital Management; Financial Performance; Contingency Approach; Interactive Models.
The Dividend Puzzle: Testing the Signalling Hypothesis in an European Context
by Júlio Lobão, Luís Pacheco, Tiago Lajas
Abstract: Dividend policy continues to puzzle researchers in the discipline of finance. In this paper we test the signalling effects of the dividend payout for a set of European firms that had sustained earnings growth for a minimum period of five years with a decline in the last year. To the best of our knowledge this is the first paper to run and compare the results of several different models including the recently created Simultaneous-Equation Model in its linear and nonlinear forms alongside a simple OLS based estimation. Our results show that managers change dividends to signal equity-scaled earnings prospects instead of asset-scaled earnings. We also find evidence that managers change dividends for signalling previous earnings changes and may distribute dividends to reduce agency costs. These findings suggest that managers identify shareholders as the accepters of dividends and the most direct targets to signalling information.
Keywords: Dividends; Signalling Hypothesis; Behavioural Finance.
An Econometric Investigation of Hedging Performance of Stock Index Futures in Korea: Dynamic versus Static Hedging
by Mohammad Hasan, Toufiq Choudhry, Yuanyuan Zhang
Abstract: Employing daily data of stock index and stock index futures, this paper empirically investigates the hedging effectiveness of time-varying hedge ratios of emerging futures markets using South Korea as a case. This paper employs eight variants of GARCH models to estimate the hedge ratios along with the conventional methods, and compares the hedging effectiveness of these estimated hedge ratios across model specifications using both within-sample and out-of-sample forecasting performances. In contrast to recent research findings, hedging performance based on a conventional OLS method outperforms the GARCH class models.
Keywords: Stock index futures; time-varying hedge ratio; GARCH model; hedging effectiveness.
Split credit ratings of banks in times of crisis
by Surraya Rowe
Abstract: This paper analyses whether opacity of bank creditworthiness increases during crisis periods and if the conservativeness of CRAs changes through business cycles. Univariate and multivariate methodologies are used: data from Moodys and S&P on credit ratings and watch status for 133 commercial banks across 17 developed countries from 2007 to 2015 is employed. The univariate analysis is a unique technique that provides a new perspective to assess whether splits between CRAs are defined as permanent or temporary. The evidence demonstrates that Moodys and S&P frequently disagree. S&P is shown to be the more conservative CRA overall, however, the extent to which Moodys issues higher ratings decreases over time until it becomes the more conservative CRA. The paper is the first of its kind to establish that the conservativeness of Moodys and S&P changes throughout business cycles, which should impact on the strategic decision making of investors.
Keywords: Credit Ratings; Credit Rating Agencies; Split ratings; Watchlist; Banks; Financial crises; Sub-Prime Crisis; Ambiguity; Opacity; Creditworthiness; Time-Weighted Split; Moody’s; Standard and Poors (S&P); Business cycles.
Going-Concern Opinions and Corporate Governance
by Ning Ren, Yun Zhu
Abstract: This paper looks into the issuance of auditors going-concern opinions and investigates how it triggers subsequent changes in corporate governance, specifically, the corporate control, executive compensation and management turnover. Using a difference-in-difference approach with the exogenous shock of Auditing Standard No. 5 (AS5) in 2007, we find that going-concern opinion leads to the decrease in blockholder ownership and institutional ownership, the reduction in CEOs cash compensation and total compensation, and the increase in the turnovers of top executives and auditors, indicating strong monitoring function of the auditors.
Keywords: going-concern opinion; corporate governance; blockholder ownership; institutional ownership; CEO compensation; CEO turnover.
Managerial overconfidence and M&A performance:Evidence from China
by Jie Michael Guo, Jia Liu, QIan He, Jiayuan Xin
Abstract: We examine the extent to which managerial overconfidence creates value to acquirers in successful M&As undertaken by Chinese listed firms in the period of 20062012. The empirical results show that Chinese acquirers gain value in both the shortrun and the longrun after the M&A announcement. Our study provides new evidence that the market responds favorably to M&A deals undertaken by acquirers with more managerial overconfidence in both the short run and the long run. Our multivariate analyses, however, show that managerial overconfidence has a minimal role in explaining the stock price movement. In addition, we find that firm size is an important determinant for the relationship between overconfidence and market reaction to merger deals. Taken together, we conclude that managerial overconfidence has little effect in driving merger and acquisition deals in China.
Keywords: Mergers and Acquisitions; Market Performance; Managerial Overconfidence; Chinese Market.
Market reaction to the European antitrust investigations in the payment card industry
by Francesca Battaglia
Abstract: This paper aims to analyze the stock price reaction of European banks involved in antitrust authority interventions regarding the payment card business. The main objective is to assess whether market discipline is effective and able to complement regulation (Berger et al., 2000) despite the opacity of the business (Morgan, 2002). To this end, we collect all interventions made by both domestic antitrust authorities and by the European Commission to investigate and/or sanction anticompetitive behavior in the payment card sector over the period 2004-2015. This results in a sample of 24 events, involving 135 listed banks operating in the EU-27 area. We run an event study analysis based on a traditional market model in order to estimate cumulated abnormal returns (CARs), considering both the date when the formal investigation is open and the date when the outcome of the procedure is communicated to the market. Our findings provide weak evidence in favor of the effectiveness of market discipline, with a significant (negative) market reaction only for investigations involving a small number of well-identified banking institutions, while procedures involving large banking associations or payment networks do not generate any relevant reaction.
Keywords: payments market; payment cards; interchange fees; merchant; cardholders; event study; fines; antitrust authority.
Special Issue on: BAFA-NAG 2016 Contemporary Issues in Finance and Accounting
Determinants of CSR disclosure in Mexico
by Claudia Arena, Yanira Petrides, Petros Vourvachis
Abstract: This paper investigates Corporate Social (and environmental) Responsibility (CSR) disclosure practices in Mexico. It utilises a detailed manual content analysis and identifies corporate governance related determinants of CSR disclosure. The study shows a general association between the governance variables and both the content and the semantic properties of CSR information published by Mexican companies. Whilst an increased international influence on CSR disclosure is noted, the study particularly reveals the symbolic role of CSR committees and the negative influence of foreign ownership on community disclosure, suggesting improvements in business engagement with stakeholders are needed for CSR to be instrumental in business conduct.
Keywords: Corporate Social Responsibility (CSR); CSR disclosure; disclosure determinants; Mexico; corporate governance; legitimacy theory; stakeholder engagement; content analysis.
Special Issue on: ICAFFI 2016 Finance and Financial Institutions in Emerging Markets
The effect of government involvement and payment method on merger and acquisition performance: the case of China
by Matthias Nnadi
Abstract: This paper applies a sample of 842 to investigate the effect of government involvement and payment methods on merger and acquisition of Chinese listed firms for the period 1993 - 2015. The study employs market model as benchmark to estimate expected returns for several event windows. We find that Chinese acquirer shareholders experience higher returns from the acquisitions in firms with no government involvements than those where government is involved. Our study demonstrates that stock-financed acquisitions maximise the wealth gains of shareholders than cash-backed acquisitions. Our finding further shows that using cash to finance government backed acquisitions yields extra wealth for investors on the announcement date whilst the market experience higher abnormal returns when stocks are used to finance the acquisition of privately held targets. The result of this paper has significant policy implications for both M&A financing decisions and government involvements in merger deals.
Keywords: government; involvement; acquisitions; mergers; performance; abnormal; returns.
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.
Forecasting the Daily Dynamic Hedge Ratios in Emerging European Stock Futures Markets: Evidence from GARCH models
by Mohammad Hasan, Toufiq Chowdhry, Yuanyuan Zhang
Abstract: This paper empirically estimates and forecasts the hedge ratios of three emerging European and one developed stock futures markets by means of seven different versions of GARCH model. The seven GARCH models applied are bivariate GARCH, GARCH-ECM, BEKK GARCH, GARCH-DCC, GARCH-X, GARCH-GJR and GARCH-JUMP. Daily data during January 2000-July 2014 from Greece, Hungary, Poland and the UK are applied. Forecast errors based on these four stock futures portfolio return forecasts (based on forecasted hedge ratios) are employed to evaluate out-of-sample forecasting ability of the seven GARCH models. The comparison is done by means of Model Confidence Set (MCS) and modified Diebold-Mariano tests. Forecasts are conducted over two non-overlapping out-of-sample periods, a two-year period and a one-year period. MCS results indicate that the GARCH model provides the most accurate forecasts in five cases, while each of the GARCH-ECM, GARCH-X and GARCH-GJR models constitutes model confidence set in four cases at a reasonable confidence level. Models selection based on modified Diebold-Mariano tests further corroborate results of the MCS tests. Differences between the portfolio returns also indicate the high forecasting ability of GARCH-BEKK and GARCH-GJR models.
Keywords: Forecasting; hedge ratio; GARCH; emerging market; volatility.