Afro-Asian J. of Finance and Accounting (67 papers in press)
An approach to corporate capital structure of Southeast Asian countries
by Tri Minh Hoang, An Thai
Abstract: This study investigates the determinants of capital structures of listed firms in Southeast Asia, including Vietnam, Thailand, Indonesia, Malaysia, the Philippines, and Singapore, between 1995 and 2014. Based on the most up-to-date data from Thompson Innovation, we employ feasible generalised least squares (FGLS) to test funding behaviours of individual countries and the whole region. Empirical evidence supports neither the pecking order theory nor the trade-off model as the best-fit framework to understand the capital structures of firms in Southeast Asia, though the trade-off model has more precise predictions of the data than the pecking order model. Besides, the outcomes demonstrate that understanding firm nationality is necessary to determine countries conventional corporate capital structure models.
Keywords: corporate finance; capital structure; listed firms; panel data; Southeast Asia.
New evidence for the determinants of foreign investment in an Asian market
by Ben Le
Abstract: This paper examines foreign investment in Vietnamese stock markets from 2013 to 2016. Previous studies for sample periods prior to 2013 find that foreigners invested relatively more in low liquidity shares. In contrast, this paper shows that foreigners now invest relatively more in high liquidity stocks. This study also investigates the investment determinants of foreign blockholders who own at least five percent of shares outstanding separately from those of the other foreign investors. The results show that foreign blockholders are more available to assume certain types of risk than the other foreign investors. Further, the investment preferences are similar between foreign blockholders and local blockholders. The results of the paper suggest that the availability of investors to assume risk, which is dependent on their wealth levels, is a possible explanation of equity home bias.
Keywords: foreign investment; market liquidity; assume risk; blockholder; Vietnam.
Corporate governance and investment cash-flow sensitivity: evidence from Tunisia
by Dorra Ellouze, Wafa Cherif
Abstract: The aim of this paper is to investigate the effect of corporate governance quality on investment cash-flow sensitivity. We use panel data for a sample of 40 Tunisian non-financial firms listed on the stock exchange over the 2007 to 2016 period. Our results indicate that investment is sensitive to cash-flow but this investment cash-flow sensitivity is reduced when firms exhibit better governance quality. These findings suggest that improvement of corporate governance can solve agency problems and reduce financial constraints. We conclude that better governance leads to more efficient investment allocation in Tunisia.
Keywords: investment cash-flow sensitivity; financial constraints; corporate governance.
Debt maturity and the development of financial markets in Vietnamese listed firms
by Thuy An Chung, Quynh Trang Phan
Abstract: This study examines the determinants of the corporate debt maturity structure for the period from 2007 to 2016, using a sample of non-financial listed firms chosen from two stock exchanges: the Ho Chi Minh Stock Exchange (HOSE) and the Ha Noi Stock Exchange (HNX). The regression results partially support the theories of agency cost, signalling and liquidity risk, and provide little evidence supporting the theory of tax minimisation. We find that leverage, firm size and lagged debt maturities are the important factors in the choice of corporate debt maturity. Other evidence documents that the development of the equity market plays an important role in the financial structure.
Keywords: leverage; firm size; equity market; debt maturity; emerging markets.
An empirical examination of correlation dynamics between commodity and equity derivative indices: evidence from India using DCC-GARCH models.
by Swamy Perumandla, Padma Kurisetti
Abstract: This empirical study investigates the time-varying co-movements and volatility linkages between equity-commodity indices and inter-commodity indices. This paper deploys the DCC-GARCH framework. Three versions of GARCH, namely standard, threshold and exponential, with both symmetric and asymmetric versions of Dynamic Conditional Correlations (DCC) have been used. This study considers equity index Nifty 50, non-agricultural commodity indices MCX Energy and MCX Metal along with agricultural commodity indices Dhaanya and MCX Agri. Our results revealed that the combined portfolio of commodities-equity has low or negative correlations, which provide better diversification property rather than a portfolio without commodities. However, we notice a steep decline in time-varying correlations of equity with non-agricultural commodity portfolio since 2013. The mixed portfolio of the agricultural commodity with non-agricultural commodity can also offer diversifying benefits. We found high volatility shifts in time-varying co-movements of Nifty 50- MCX Agri pair. On the other hand, we observed an increasing trend in the co-movements of Nifty 50-Dhaanya, it indicates the interdependency of these two markets. Non-agricultural commodity pair (MCX Energy-MCX Metal) and agricultural commodity pair (MCX Agri-Dhaanya) fail to offer better-diversifying properties. This study provides an essential insight to policymakers, portfolio managers, domestic and international investors, risk analysts and financial researchers in an emerging market.
Keywords: commodity derivative markets; equity market; DCC-GARCH; time-varying co-movements; diversifying portfolio.
The impact of financial flexibility on debt maturity structure for Australian and Malaysian firms
by Huey Chyi Ng, Fan Fah Cheng
Abstract: Financial flexibility enables firms to respond positively to unanticipated shocks or investment opportunities. Financial flexibility and the debt maturity structure are important for a firms survivability. During a crisis, highly leveraged firms cannot survive owing to the inability to pay back and roll over their debt for longer maturity. Financial flexibility could contribute better capital structure decisions and reduce risk. This paper investigates financial flexibility and the impact on the debt maturity structure in Malaysian and Australian firms. The results suggest that Malaysian firms follow a pecking order theory, whereas Australian firms follow the trade-off theory. Financial flexibility firms are generally less leveraged. These firms were found to have less long-term debt in both countries. They prefer short-term debt since they are able to access financing resources at lower cost. Nonfinancial flexibility firms prefer long-term debt because of the reduced capability of repayment and the high rollover risk if they hold short-term debt.
Keywords: capital structure; financial flexibility; debt maturity structure; Malaysia; Australia.
Analysing the effect of trading characteristics on liquidity measures: a combined approach to liquidity. Evidence from Tehran Stock Exchange
by Seed Fathi, Somaye Jalali, Alireza Ajam, Omid Mirmohammad Sadeghi
Abstract: Liquidity estimation has always been of conspicuous importance to all investors as well as risk and return. The purpose of this study is to examine the impact of trading characteristics (price, trading volume, variability, return volatility, absolute stock return, and Beedles' thin trading measure) on liquidity measures (Amihud illiquidity ratio, return reversal measure, stock turnover, zero return, turnover-volatility ratio and proportional bid-ask spread ) in Tehran Stock Exchange. We extend previous studies by combining different liquidity measures using TOPSIS technique and by employing a multidimensional variable, namely TOPSIS output. Results reveal both of the liquidity measures are strongly related to trading characteristics including stock turnover and zero return. Also, stock price, trading volume, and Beedles' thin trading measures are the most significant factors in estimating liquidity. Different effect of different liquidity measures indicates that liquidity is a multidimensional and complex concept, and each measure reflects only one aspect of liquidity. The results of examining the influence of trading characteristics on the combined (multidimensional) liquidity measure indicate that trading characteristics are the main determinants of liquidity.
Keywords: liquidity; trading characteristics; liquidity measures; Tehran Stock Exchange.
Value relevance of reported financials of NSE listed companies
by Mwila Mulenga, Meena Bhatia
Abstract: The purpose of this paper is to examine value relevance of accounting information in Indian stock markets, with a view to determine whether accounting information has the ability to explain stock prices and stock returns. The study focuses exclusively on the listed and actively traded firms under Nifty 100 from 2001 to 2015, and uses price and returns models. The findings under both models suggest that accounting information has the significant ability to influence stock prices and stock returns during the entire period covered by this study. Further analysis shows that book value per share is more relevant for loss-making firms, whereas earnings per share are more relevant for profit-making firms. Based on industry classification, the value relevance of accounting information is reported as being high in the metal industry, infrastructure, energy, financial services, automobiles and services industry, and low in consumption and pharma industry. The study concludes that accounting information is relevant for investment decisions, and investors must focus on this information to make informed investment decisions. Furthermore, regulators should put in place a strong adequate monitoring mechanism to ensure that the accounting information presented by the listed firms is reliable, and also they should improve the enforcement of accounting standards so as to improve the quality of accounting information used for investment purposes.
Keywords: accounting information; value relevance; Indian stock market; price model; returns model; NSE; India.
Decomposition of the dividend forecast model: firm characteristics or market discrimination? Evidence from the Korean market
by Injoong Kim
Abstract: Historically, KOSPI firms have shown consistently higher chances of dividend payment compared to KOSDAQ firms. The counterfactual decomposition technique popularised by Oaxaca and Blinder is adapted to explain the dividend differentials between the two markets. Our results suggest that there exists market discrimination that cannot be explained by the traditional dividend forecast model of Fama and French (2001). After controlling for the group differences in firm characteristics, such as size and profitability, KOSPI firms still have a higher probability of paying dividends, and, especially during the crisis period, they deal with risks better and are less affected by macroeconomic shocks. We observe the level difference after controlling for firm characteristics as well as the difference in the sensitivity of dividends with respect to the dividend predictors between two markets. For the crisis period, the explanatory power of firm characteristics drops, and the market effect plays a dominant role in explaining dividend behaviour.
Keywords: dividend; decomposition; firm characteristics; KOSPI; KOSDAQ; Korea; propensity to pay dividends; discrimination.
The impacts of public investment on return and economic growth by economic industry in Vietnam
by Canh Nguyen, Lien Nguyen
Abstract: This study empirically analyzes the impact of public investment from government budget on economic growth by measuring the indirect effects of public investment on return and private investment in 16 economic industries from 1990 to 2016. The findings show the positive relationship between private investment and return on total assets by industry. Economic growth, the share of public investment in infrastructure and the share of public investment in education also have a positive impact on return on total assets by industry. However, total state sector investment has a negative effect on the return on total assets by industry. In addition, when observing after-tax profit by industry, it appears that the share of total investment in GDP is positively affected by the share of manufacturing industry in GDP and labuor productivity by industry.
Keywords: public investment; private investment; state sector investment; total investment; return on investment; investment in education; labour productivity.
Board attributes and voluntary disclosure in an emerging economy: evidence from Nigeria
by Robert Odewale
Abstract: This study examines the effect of board attributes (board size, board composition and CEO duality) on the extent of voluntary disclosure using data for 237 firm-year observations from 75 firms listed on the Nigerian Stock Exchange from 2009 to 2012. The study constructs disclosure index score comprising 36 items. Using random-effects regression model, the result shows that CEO duality is negatively related to voluntary disclosure. This study also finds that board size and board composition do not have any significant relationship with voluntary disclosure. This study has implications for future researchers, regulators, and investors. Future researchers may find it interesting to examine board behaviour in order to understand the complexities of board operations as it affects their monitoring role. There is no evidence that the introduction of Corporate Governance Code by the Nigerian Securities and Exchange Commission has led to improvement in the voluntary disclosure made by listed companies. There is therefore the need for regulators to improve their enforcement and compliance mechanism at ensuring that listed companies comply with the disclosure requirements. It may also be appropriate that certain disclosures be made mandatory, since the management may not have the incentives to make such disclosures.
Keywords: board attributes; corporate governance; voluntary disclosure; emerging economy; board size; board composition; CEO duality; disclosure index; Nigeria.
The stability of money demand in India in the post reform period: an empirical analysis
by Mohammad Asif, Rana Afreen
Abstract: This paper provides an empirical analysis of the stability of demand for money in India using ARDL cointegration framework. The study of stability of money demand is important in deciding the appropriate instruments of monetary policy. The present study examines the demand for money by using annual data over the period 1991-2015. The ARDL model bound test procedure has confirmed that a stable, long relationship exists between M1 and its determinants, such as income, interest rates, exchange rates and inflation. Through results we conclude that income elasticity coefficient is positive and significant while the coefficient of inflation and interest rate is negative. Demand for money is negatively affected by exchange rate, supporting the Bahmoni-Oskooee-Pourhedrian (1990) argument. This study also examines the cointegration in the presence of structural break by using the Gregory-Hansen single structural break approach. The study does not find any cointegration in the presence of a single structural break. Our result also reveals that M1 is stable between the sample period when we incorporate the CUSUM and CUSUMSQ tests.
Keywords: money demand; ARDL; structural break; stability; India.
Factors that drive dividend payout decisions: an investigation in the context of Bangladesh
by Afrin Rifat, Anika Bushra, Nabila Nisha
Abstract: Generally, dividend policies guide the financial rewards of the shareholders. It is often a challenging decision for companies to determine the appropriate level of dividend for the shareholders. While some past studies argue microeconomic factors to drive the decision of dividend policies, many other researchers claim that it is the macroeconomic factors of a country which ultimately influences the dividend payouts. However, there is a paucity of research in this area for emerging countries like Bangladesh. This study thus examines impacts of a set of pre-determined microeconomic and macroeconomic factors upon cash dividend payouts by analyzing a sample of listed firms of the Dhaka Stock Exchange (DSE), Bangladesh. Findings are analysed based on liquidity, leverage, growth, and size of the sample firms for microeconomic factors; while, macroeconomic factors are analyzed upon dividends on an average basis. The results provide policy implications for shareholders, management, policymakers and the government of Bangladesh.
Keywords: dividends; microeconomic variables; macroeconomic variables; profitability; company-specific; country-specific; emerging economy; Bangladesh.
Volatility interdependency: a quantile regression analysis in Asian stock markets
by Neha Seth, Laxmidhar Panda
Abstract: The purpose of this paper to investigate the structure of volatility interdependency among the Asian stock markets during the period of the Global financial crisis (GFC) and the European sovereign debt crisis (ESDC). Design/methodology/approach:
This paper uses Quantile Regression (QR) technique in the conditional volatility series obtained from the result of ARIMA (p, q)-GARCH (1, 1) model. The sample includes stock market indices from eight emerging countries, i.e. China (SHCOMP), India (BSE100), Indonesia (JCL), Malaysia (FBMKLCI), Philippines (PCOMP), South Korea (KOSPI), Taiwan (TWSE), Thailand (SET) and three developed countries, i.e. Hong-Kong (HIS), Japan (NKY) and Singapore (FSTAS). The study covers the period of two recent financial crises (GFC and ESDC), from 2nd January 2000 to 31st March 2016. The results of the QR model strongly support volatility interdependency among the Asian stock markets during the period of financial crisis. The results of this paper also indicated that emerging markets are majorly affected by conditional volatility generated from developed markets in periods of financial crisis. Despite the availability of a large body of theoretical and empirical literature on financial contagion (excess volatility transformation in a financial crisis), there exist a very small number of empirical studies on contagion analysis by employing QR technique. This paper provides valuable information regarding the complex volatility structure among the Asian stock markets during the crisis period which may help to domestic and foreign Investors in taking major decisions on portfolio diversification during periods of global financial turbulence.
Keywords: financial contagion; volatility interdependence; quantile regression.
Macroprudential policy and financing behaviour in emerging markets: bank-level evidence from Indonesian dual banking
by Muhamed Zulkhibri, Muhammad Rizky Prima Sakti
Abstract: The loan-to-funding ratio based reserve-requirement (RR-LFR) is a macroprudential instrument used by Bank Indonesia (central bank) to maintain the stability of Indonesian financial system by considering the bank liquidity conditions. This paper examines the impact of RR-LFR on financing behaviour in a dual banking system (Islamic and conventional banks) using generalized method of moment estimation (GMM) technique to address the endogeneity of explanatory variables and reduce the possible biases from residual correlation. Using a bank-level data for both Islamic and conventional banks covering the period 2001-2015, we analyse the reaction of bank financing behavior toward RR-LFR policy. The findings indicate that RR-LFR is effective in curtailing financing behaviour of banking institutions. Further, we show that RR-LFR exerts more impacts on managing credit expansion of conventional banks than Islamic banks. The study suggests that a specific macroprudential framework should be put in place to address systemic concerns for each types of banks. Hence, the supervisory authorities will be able to identify the channel of macroprudential transmission and to device an optimum policy mix for their banking system.
Keywords: macroprudential; financing behaviour; Islamic banking; Indonesia; GMM method.
Day of the week effect anomaly in Dhaka Stock Exchange in the post-crisis period: evidence from Bangladesh capital market
by Md Arafat Hossain, Vahid Biglari
Abstract: This study examines the day of the week effect anomaly in Dhaka Stock Exchange (DSE), during the post-crisis period. The Bangladesh stock market crashed on 19 December 2010, and the stock market remained sluggish for a long time. This study used the daily closing prices of two important indexes (DGEN and DSI) during the post-crisis period, from 19 December 2010 to 31 December 2013. Regression statistics model with dummy variables, one-sample T-test statistics, paired-sample T-test statistics and ANOVA (one-way) for parametric test and Kruskal-Wallis and Wilcoxon signed rank test for non-parametric test, have been used to observe the day of the week effect anomaly in DSE. The results revealed irregularities in daily mean returns with different returns volatility during the week. The study provides implications for policy makers to develop appropriate post-crisis policy tools and incentives to re-stabilise the market.
Keywords: Dhaka Stock Exchange; day of the week effect anomaly; stock market crash; regression with dummy variables; Kruskal-Wallis test; Wilcoxon signed rank test.
Analysing the stability of bankruptcy prediction models
by Rohani Md-Rus, Kamarun Nisham Taufil Mohd, Rohaida Abdul Latif
Abstract: The aims of this study are to assess the predictive power of the logit model and hazard model in predicting bankruptcy and to analyse the stability of the models. Using Malaysian listed companies and a sample span from 1998 to 2014, this study found that, for the hazard model, all variables were significant whereas for the logit model only five variables were significant. The results also show that the logit and hazard models both had predictive accuracies of more than 90%. However, the hazard model had a predictive accuracy of 99.4% whereas the logit model had a predictive accuracy of 91.8%. The hazard model was more stable than the logit model as the predictive accuracy of the hazard only changed only a little when a smaller sample was chosen. Lastly, the study showed that, even though both models were good in predicting distress, the hazard model is better than the logit model.
Keywords: logit model; hazard model; bankruptcy prediction; stability; profitability; leverage; growth; cash flow; size; Malaysia.
The effect of dividend payouts on future earnings
by Gizelle Willows, Lawrence Ho, Darron West
Abstract: The conventional expectation of the relationship between the level of dividend payout and future earnings growth, based on established finance theories, is that it is negative. This expectation stems from the perceived attractiveness of having enough available retained earnings to fund any potential future growth opportunities. However, research performed in various markets at the turn of the century has challenged this belief. This paper seeks to update this theory by investigating the relationship in a more current data set, from 1988 to 2014. Furthermore, given the investment opportunities within emerging markets, the data set pertains to South African listed companies. Assessing two different earning measures, over multiple years, a multivariate regression analysis revealed a statistically significant positive relationship between dividend payout and future earnings. Dividend payout decisions are seen by investors as a predictor for future value growth and, as such, management should be aware of their associated dividend distribution decisions.
Keywords: dividends; earnings; emerging market; value growth; payouts; future earnings; retained earnings; dividend distributions; leverage; earnings yield.
Financial restructuring of firms under weak bankruptcy laws: an Indian experience
by Smita Mazumdar, Anupam Rastogi
Abstract: This paper empirically investigates the behaviour of firms with respect to capital usage under a weak insolvency and bankruptcy law, using Indian corporate data over a period of 2000-2014. It suggests that firms tended to borrow more post restructuring of debt under the corporate debt restructuring mechanism - an informal arrangement supported by the central bank of India. We find that firms manage to obtain more debt from lenders thereby signalling to the market of possible path of recovery. But these firms do not show improvement in profitability post financial restructuring, indicating that lenders under a weak bankruptcy regime postpone the day of reckoning. The empirical evidence corroborates the theory of agency cost of debt and the signalling hypothesis in the change in capital structure of firms.
Keywords: financial restructuring; CDR; corporate debt restructuring; leverage; capital structure; Insolvency and Bankruptcy Code; India.
The influence of foreign currency earnings and foreign capital on earnings management
by Modekurti Kameshwar Rao, K. Lubza Nihar
Abstract: Earnings management has been researched extensively. Yet it offers scope for further study owing to the complexity of influencing factors and the variety of accentuating contexts. This paper examines the phenomenon in the context of firms with foreign currency earnings and in the presence of foreign capital. Firms engaged in international business may face either of the contexts or both. Considering the NSE 200 companies of India, for the period of 2010-2016, this paper examines two primary research questions namely, 'does the presence of foreign currency earnings influence earnings management?', and does the presence of foreign capital influence earnings management?'. Empirical evidence in this paper reports positive influence of foreign currency earnings, and negative influence of foreign capital, on earnings management. The results do not change even when different measures of managed earnings (dependent variable), foreign earnings, and foreign capital (independent variables) are adopted, and remain robust when controlled for firm level factors such as size, level of operations, and industry affiliation. This paper contributes to the meagre international literature on the theme 'international orientation and earnings management', and is the first empirical evidence on this theme from a significant emerging economy, India.
Keywords: earnings management; foreign currency debt; foreign earnings; earnings volatility; debt covenants; ADR; meet and beat expectations; FIIs; discretionary accruals; Jones model.
Managerial entrenchment hypothesis and dividend payout policy
by Raheel Gohar, Ayesha Rashid
Abstract: The influence of managerial entrenchment on dividend payout policies is studied for the period 2006 to 2014. The results of the study indicate that the ratio of the sum of shares owned by the CEO, the Chairman and the directors (i.e. insider ownership) is negatively related to both the likelihood and the payment of dividends. Even when controlling for firm size and leverage, it is found that the ratio of shares owned by the block holder shows negative and significant results (for both the logit and the tobit regression). This study proves that either the block holders are part of the management or they have strong board representation, so they do not consider dividend payouts as a disciplining and monitoring mechanism. Investment opportunities and leverage have a negative and significant relationship with both the likelihood and the level of payouts.
Keywords: managerial entrenchment; dividend payout policy; logit and tobit regression; Pakistan.
How debt maturity reacts to the interactions of internal corporate governance mechanisms
by Hanan Alhussayen, Ridha Shabou, Imed Medhioub
Abstract: The two primary internal corporate governance mechanisms, boards of directors and ownership structures, are important for disciplining managers through short-term and long-term debt and, thus, debt maturity. The interactions between these mechanisms tend to define which type of debt is the more effective discipline mechanism. Thus, this study aims to define the impacts of interactions between intensive board monitoring and ownership structures on debt maturity for all non-financial firms listed on the Saudi market from 2008 to 2013. The results reveal that board monitoring intensity encourages Saudi listed firms to apply more long-term debt. Both direct ownership by large shareholders and family-held firms as controlling shareholders strengthen the monitoring functions of the board and encourage Saudi listed firms to apply more long-term debt. In contrast, ultimate owners, who hold indirect ownership of firms, tend to distract the board from applying its monitoring functions effectively.
Keywords: intensive board monitoring; direct ownership; indirect ownership; family ownership; debt maturity; long-term debt; short-term debt.
International Financial Reporting Standards adoption and accounting quality: evidence from Ghanaian listed firms
by Benjamin Yeboah, Cláudio Pais
Abstract: The adoption of International Financial Reporting Standards (IFRS) by Ghanaian listed firms forms the basis of higher accounting quality and reliability of accounting information from IFRS application. Existing literature suggests that the adoption affects the level of accounting quality. The aim of this paper is to examine whether the shift to IFRS minimises weaknesses in Ghana National Accounting Standards (GNAS) in measuring accounting quality. The paper employs research design metrics of discretional accruals, accrual quality, earnings smoothness, small loss avoidance and price-earnings to compute accounting quality of Ghana Stock Exchange (GSE) firms. The results suggest that accounting quality has improved after the shift to IFRS. This research fills the gap in Ghana level, given that there was no such study. Also, this study gives evidence of improvement in the information environment of GSE capital market after the shift in terms of information quality and accounting comparability.
Keywords: IFRS adoption; accounting quality; earnings management; Ghana.
Are banks profitable and efficient? A case study of Pakistan
by Muhammad Ali, Chin-Hong Puah
Abstract: The aim of this study is to investigate the impact of bank-specific factors and macroeconomic environment on bank profitability and management efficiency in Pakistan. The sample data comprised 24 banks over a sample period of 2007-2015. The panel least squares regression with fixed effect model suggests that bank profitability is significantly affected by bank size, credit risk, and bank stability. On the other side, bank efficiency is significantly predicted by liquidity risk, credit risk, and funding risk. The robustness of results was confirmed in the presence of the macroeconomic environment. Overall, this research provides a new insight into bank profitability and efficiency. Additionally, prior studies have neglected the management efficiency as a dependent variable. Therefore, we consider this article as superior, which has laid a foundation for future studies.
Keywords: banking sector; finance; profitability; management efficiency; macroeconomics; Pakistan.
Trade credit in an emerging market: evidence from Kuwaiti firms
by Yomna Abdulla
Abstract: We investigate the trade credit policy in Kuwaiti firms during the period 2011-2016. Specifically, we examine the impact of the decline in oil prices on the level of trade credit and on the relationship between trade credit and firms profitability. The findings show that the decline in oil prices had no significant impact on the level of trade credit or the relationship between trade credit and profitability. We find that cashflow, cash holdings, current assets, short-term debt and size are the main determinants of trade credit. The results also show that the level of trade credit has a negative impact on a firms profitability and is more pronounced in financially unconstrained firms.
Keywords: trade credit; emerging markets; profitability; accounts payable; working capital management; oil prices.
The effect of corporate reputation on firm financial performance: evidence from Indonesia
by Iman Harymawan, Mohammad Nasih, Salsabiilaa F. P. Herlambang
Abstract: This research study examines the effect of corporate reputation on the firms financial performance in Indonesia. This study used a sample of 930 firm-year observations from the firms listed on the Indonesian Stock Exchange from 2013 to 2016 in order to examine how company reputation affects financial performance. The results show that corporate reputation affects financial performance positively. Moreover, the small firm size in Indonesia has a greater corporate reputation effect on financial performance. The implication of this study is important for management as regards the important role that reputation can play on the firms financial performance. Therefore, maintaining a company's reputation is crucial to ensure the growth of the firm's performance. In addition, this study reveals that the effect of corporate reputation effect on financial performance for a smaller firm is greater than for a larger firm.
Keywords: corporate reputation; financial performance; firm size; emerging country.
Bank capital and liquidity creation: evidence from Islamic and conventional MENA banks
by Ahmad Sahyouni, Man Wang
Abstract: This paper estimates the amount of liquidity created by MENA banks over the period 2011-2016, and further investigates the impact of bank capital on liquidity creation, controlling for a set of bank-level and macro variables. The findings conduct that banks created 18.596 trillion US dollars of liquidity, which equals 28.4% of their total assets, and conventional banks create more liquidity than Islamic banks, as do large banks compared with medium and small banks. But, the Islamic banks are the best in terms of liquidity creation per asset. The regression results also show a negative relationship between equity capital and liquidity, which supports the financial fragility crowding-out hypothesis, but only for conventional banks and for large and small size banks. Finally, the study contains some implications for decision makers and regulators in the region.
Keywords: liquidity creation; bank capital; Islamic banks; conventional banks; MENA.
Causal relation and dynamic volatility spillover between commodity market and stock market: empirical evidence from India
by Ruchika Kaura, Nawal Kishor, Namita Rajput
Abstract: The aim of this study is to investigate the causal relationship and dynamic volatility spillover effect across commodity market and stock market in India. The study is based on the Nifty index of the National Stock Exchange of India Ltd (NSE) as the representative of Indian stock market and four commodity market indices of the Multi Commodity Exchange of India Ltd (MCX), namely MCXComdex, MCXAgri, MCXEnergy and MCXMetal, as representative of the Indian commodity market. The study employs the Vector Autoregressive (VAR) model to examine the causal relationship between commodity market indices and the stock market index, Nifty. It employs the Dynamic Conditional Correlation (DCC) GARCH model proposed by Engle (2002) to measure the volatility spillover effect and to test the time-varying conditional correlation across commodity market and stock market indices. The findings highlight the existence of strong linkages between commodity market indices and Nifty. In particular, the causal relationship of all commodity market indices towards Nifty is reported. The results of the DCC-GARCH model show that correlation between the commodity market and the stock market is time-varying and highly volatile. Dynamic volatility spillover between the conditional variances of all selected commodity market indices and Nifty is found to be significant, implying that any disturbance in one market leads to the other market becoming more volatile. The findings of this study can be of immense use for portfolio managers to devise appropriate substitution and risk management strategies for the purpose of portfolio optimisation to garner more profits. The knowledge of the cross-market relationship may also be helpful for policy makers and regulators to understand the macroeconomic implications of commodity market shocks on the stock prices and vice-versa.
Keywords: VAR; DCC-GARCH; causality; dynamic volatility spillover; commodity market; Nifty.
The value relevance of research and development expenditures: a comparative analysis of Korean, Japanese, Chinese, and US manufacturers
by Gee Jung Kwon
Abstract: Research and development (R&D) expenditures are generally thought to increase a firms market value. This study examines the nonlinear value relevance of R&D expenditures from 2006 to 2015 for manufacturers listed on capital markets in Korea, USA, Japan, and China. In this regard, the study uses a nonlinear validation method based on an analytical model that adds R&D investment variables to a corporate valuation model. The results indicate that Korean and Japanese firms experience an increase in corporate value when they make R&D expenditures, but if the firms exceed their R&D expenditure limits, corporate value falls. In US and Chinese firms, R&D expenditures prompt a dramatic rise in corporate value when such expenditures are initially set to exceed certain limits, although R&D activities reduce corporate value in their early stages. Such findings have practical relevance for international investment decisions.
Keywords: research and development; accounting information; corporate value; value relevance; nonlinear value relevance; manufacturer.
The long-term performance of post-merger and acquisition: evidence from Indonesias stock market
by Josua Tarigan, Jacqueline Evania, Devie Devie, Saarce Elsye Hatane
Abstract: This study evaluates the long-term share performance of firms over three years after they underwent merger and acquisition (M&A) in the period of 2010-2013. This is happening since researchers failed to find answers in the short-term analysis and began looking for answers through long-term analysis. Most previous studies have been done either in big capital markets (US and UK) or smaller capital markets such as Greece and Malaysia but not Indonesia. Moreover, this study also added the size of the acquirer, the method of payment and the ownership concentration together towards the long-term share performance, which is different from previous studies. The share performance was measured through Cumulative Market Adjusted Abnormal Return (CMAR) and Buy and Hold Abnormal Return (BHAR). The result of this study provides evidence of the presence of negative abnormal returns of the merged and acquiring firms. The result also shows that large size acquirers earned lower loss of abnormal returns than the small size acquirers. Moreover, the results show that cash payments are preferable to the share settlement. The results also reveal that the firms that are owned by families tend to outperform the firms that are not owned by families
Keywords: merger and acquisition; share performance; Indonesia; cumulative market adjusted abnormal return; buy and hold abnormal return.
Infrastructure-FDI nexus in Nigeria: insights from nonlinear threshold regression model
by Md Mahmudul Haque, Mohammad Ashraful Ferdous Chowdhury, Mohammad Hassan Shakil, Abul Mansur Mohammed Masih
Abstract: Infrastructural development of the host country is one of the major determinants of attracting FDI. However, the nonlinear threshold relationship between the infrastructural development and FDI inflow is yet to be explored. The objective of this research is to find the threshold effect of infrastructure on FDI in Nigeria. Using Hansen's (2000) threshold regression over the period 1972-2015, the study found that the relationship between infrastructure development and FDI is nonlinear. Furthermore, the relationship between infrastructure and FDI is positive in both regimes; however, the marginal positive impact of infrastructural development in attracting FDI is more evident after the threshold level. The findings provide support to the regulators and policy makers to improve infrastructural development for attracting more FDI in the economy, which fosters economic growth.
Keywords: infrastructural development; FDI; threshold regression.
Owner risk and firm valuation: evidence from Korean business groups
by Haksoon Kim
Abstract: Since Berle and Means (1932) and Jensen and Meckling (1976), numerous empirical studies have been done on corporate governance regarding ownership structure, board characteristics, and monitoring mechanism. However, there is little empirical evidence of the relationship between owner risk and firm valuation. We investigate this relationship using the unique owner risk index score data of Korean business groups. A high score means low owner risk. We find that there is a positive relationship between owner risk index score and firm valuation for Korean business groups. Specifically, the positive relationship is statistically significant in the professionalism and quality or ethical management without group dummy. The positive relationship is statistically significant in the transparency and accountability or ethical management with group dummy. The results suggest that owner risk is an important governance factor affecting firm valuation.
Keywords: owner risk; firm valuation; corporate governance; business group.
Ownership concentration and firm valuation in a typical frontier market
by Nam Tran, Chi Le
Abstract: This study investigates the valuation effect of concentrated ownership in a typical frontier market. Using an extensive sample of Vietnamese publicly listed firms, we find that the valuation effect is inconclusive before combined equity holdings reach a certain threshold, beyond which market valuation increases exponentially with ownership. The latter log-linear effect can be interpreted as a more profound dominance of the monitoring incentives of large shareholders over the potential expropriation of minority shareholders at higher levels of concentration. Our finding reconciles the seemingly conflicting results of previous studies and contributes to understanding corporate governance practices in frontier markets.
Keywords: ownership concentration; market valuation; piecewise linear regression; frontier markets; Vietnam.
Martingale effect of conventional versus Islamic stock indices: evidence from the UAE
by Hazem Marashdeh, Sania Ashraf
Abstract: This study aims to identify the martingale effect of conventional and Shariah equity markets in the United Arab Emirates. The study employs the runs test for randomness, and the Breusch Godfrey LM test and the variance ratio test using daily returns for the period January 1, 2008 to August 31, 2017. The empirical results indicate that the UAEs conventional equity market operated efficiently, while the Shariah equity market lacked randomness during the study period. The existence of stock-market efficiency in the conventional stock price index is considered an essential factor for attracting foreign portfolio investment. Nevertheless, the inefficiency of the Shariah market offers opportunities for well-informed investors to achieve abnormal levels of returns. However, having an inefficient Islamic market index points to the need for Shariah boards to make the market more transparent and ensure information flows are instantaneous. The findings of the study have useful implications not only for investors but also for regulators and policy makers in terms of the need to reduce economic distortions through more effective resource allocation.
Keywords: martingale; heteroscedasticity; informational efficiency; Breusch Godfrey LM test; variance ratio test.
Investigation of stock return volatility using Shannon entropy: evidence from ASEAN stock markets
by Xuan Vinh Vo, Thi Tuan Anh Tran
Abstract: This study assesses stock market volatility in ASEAN countries. We use Shannon entropy as an alternative measure to traditional measure of stock return volatility. We use daily stock price data of national stock market indices of ASEAN countries (Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam) for the period from August 2001 to December 2016. The results show that the returns series of Vietnam VNINDEX is the most volatile stock index, followed by Indonesia, Singapore, Malaysia, Thailand and the Philippines. The study also suggests that entropy is an important alternative to the traditional measure of stock return volatility. The study offers important implications for risk management and portfolio theory.
Keywords: volatility of stock returns; standard deviation; entropy; Shannon entropy; probability density function.
Corporate governance, transparency and performance: empirical evidence from UAE
by Mostafa Kamal Hassan, Cristina Florio, Bassam Abu Abbas
Abstract: This paper uses both the agency theory and the legitimacy theory to provide a complementary framework that links different patterns of disclosures (i.e. transparency) to corporate performance for a sample of 116 United Arab Emirates (UAE) listed firms between years 2008-2016. It investigates the relationship between corporate disclosures (i.e. transparency), organisational commitment to law, a set of governance mechanisms (namely, board size, CEO decision-making power, and foreign ownership) and corporate performance, while controlling for corporate specific characteristics such as size, type, age and leverage. The empirical results show that transparency indices have a puzzling pattern across different performance measures namely return on assets, asset turnover and organisational growth. For the non-financial sector, the results shows a positive significant association with return on assets and asset use, and a significant negative association with organisational growth. For the financial sector, the results show no association between transparency and performance measured by return on assets and asset use, and a negative association with organisational growth. The findings are important to regulators, investors, and researchers aiming at developing new policies that establish better regulatory infrastructure that increases investors confidence. The paper is one of very few studies that examine the association between corporate transparency and corporate performance in an emerging market economy, such as the UAE.
Keywords: transparency; governance; performance; disclosure indexes; emerging economies.
Different levels of family ownership and dividend payout in the presence of growth opportunities
by Irene Wei Kiong Ting, Qian Long Kweh, Norazlin Ahmad, Neshaleni S. Paramanantham
Abstract: This study examines the family ownership, growth opportunities, and dividend payout of a sample consisting of 200 of the largest publicly listed companies in Malaysia from 20112016. Three main results emerge after controlling for firm and board characteristics as well as industry and year effects in various robustness checks. First, despite their positive impacts on dividend payout, family firms exhibit a lower dividend payout relative to net income. Second, growth opportunities increase the positive impacts of family ownership on dividend payout. A positive association between growth opportunities and dividend payout is also found. Third, the moderating effect of growth opportunities on the relationship between family ownership and dividend payout is present only in firms with family shareholdings, particularly those with high and medium ownership. These findings indicate varying dividend payout in the presence of growth opportunities for the different levels of family ownership.
Keywords: dividend payout; family ownership; growth opportunities; moderating effect.
Stock market efficiency: the Pakistan Stock Exchange merger
by Asad Ali, Saqib Sharif
Abstract: This study examines the valuation, liquidity, volatility, and efficiency before and after the integration of Islamabad Stock Exchange (ISE) and Lahore Stock Exchange (LSE) with Karachi Stock Exchange (KSE) to form the Pakistan Stock Exchange (PSX). The firm-level daily data is analysed to determine the effects of regulatory change. Based on regression analyses, results indicate mixed evidence for different market measures following the integration of domestic bourses. However, the post-integration period in Pakistan is fraught with political turmoil and weak economic indicators. Thus any improvement that is hypothesised following the merger is offset by poor economic and political factors.
Keywords: stock exchange merger; valuation; liquidity; volatility; market efficiency; financial regulation; Pakistan Stock Exchange; demutualisation.
Herding behaviour and trading volume: evidence from Amman Stock Exchange
by Buthiena Kharabsheh, Mohammad AL-Gharaibeh, Suleiman Almasri
Abstract: The purpose of this paper is to examine the presence of herding behaviour in Amman Stock Exchange (ASE). Specifically, it aims to provide empirical evidence on the relationship between herding behaviour, trading volume and market liquidity levels. Using a free float share index consisting of 100 companies, the present study employs the approach developed by Chang et al. (2000). It presents an analysis of herding in relation to trading volume and liquidity relationships performed by OLS, VAR estimation and Granger causality tests. Results of daily data analysis for the period 2006 to 2017 indicate strong evidence of herding behaviour in ASE, particularly during the crisis period. The results also proved that there is a strong correlation between herding and trading volume in both directions, and intensification of herding in periods of medium or high market liquidity, but no evidence of herding at low liquidity levels.
Keywords: herding; behavioural finance; trading volume; liquidity; Jordan; financial crisis; granger causality tests; Amman Stock Exchange; free float index.
Bank growth, competition and small business financing in Nigeria
by Cosmas Asogwa
Abstract: The level of bank growth, asset concentration, and competition in Nigerias banking sector have significantly increased following a series of banking reforms, thus raising concern about these reforms effects on the efficiency of banks credit distribution. In this study, we use ex post-facto and difference-in-difference designs to examine how competition among high-growth banks has affected the banks provision of assets to small business borrowers in Nigeria. The study used a bi-sample structure through a judgmental technique that examined 126 and 96 firm-years. Thus, we focused on the period between 2001 and 2017, which enabled us to test both pre- and post-bank growth-competition Boone model effects. When we controlled for firm, market, and macroeconomic influences, we found evidence that in both the pre- and post-bank-growth eras, competition significantly increased small business loans. This finding is consistent with the competition-stability hypothesis, which considers competition as a non-credit constraining factor. A unit increase in the Boone competition indicator resulted in over a 3% credit supply to micro-credit users. However, when we used concentration ratio (CR6) as a structural measure, we found that pre-mega structure competition yields negative effects but that the post-growth effect on credit supply remains positive. Macroeconomic factors such as gross domestic product, money supply, inflation, and capital market indices yield a very significant effect on credit supply as huge banks compete with each other. Thus, policymakers should not ignore the variables in competition-monetary transmission policies in Nigeria.
Keywords: bank competition; small business; competition: lending: growth: MegaBank: Boone competition indicator.
The equity market returns and volatility spillover from the US and Japanese markets to Asian frontier markets
by T.H.I. Ngan Nguyen, T.H.I. Kieu H.O.A. Phan, Nirav Parikh
Abstract: This paper examines the magnitude of return and volatility spillovers from the US and Japan to Asian frontier equity markets (Sri Lanka and Vietnam). The US and Japan shocks are exogenous variables in the ARMA-GARCH-M model. The study indicates that the day effect occurs in Sri Lankan at pre- and post-crisis (2008). Secondly, the return contagion from Japan impacts Vietnam before, during and after the 2008 crisis. This contagion from the US influences Vietnam during and after the crisis with higher magnitudes than Japan. Thirdly, the return spillover from the US impacts Sri Lanka before and during the crisis, while this spillover from Japan to Sri Lanka occurs after the crisis. Finally, the volatility spillover from the US and Japan does not impact the Vietnamese market during the three periods. The volatility contagion from Japan influences Sri Lanka in the crisis, with no volatility spillover from the US to Sri Lanka through three periods.
Keywords: return spillover; volatility spillovers; frontier markets; contagion effects; ARMA-GARCH-M.
Home bias and return chasing by foreign portfolio investors: evidence from selected Sub-Saharan Africa markets
by Rihanat Idowu Abdulkadir
Abstract: This paper examines home bias and return chasing by foreign investors in selected Sub-Saharan African markets. Using a pooled mean group estimation on data drawn from five countries, the study did not find conclusive evidence to suggest that foreign investors exhibit home bias in the long run when they adjust their investment in line with past flows. Return chasing is not seen as the first order of business and is prioritised only in the long run, after foreign investors have gained knowledge of the market. Results show that foreign investors value countries with stable economies and invest more in the sampled markets with higher returns from industrialised markets. Policy makers should intensify efforts to make these markets more attractive for foreign investors, maintain good economic conditions and then monitor developments in industrialised markets. This approach will assist them in reacting to variations or reversals in portfolio flows resulting from occurrences in such markets.
Keywords: home bias; return chasing; foreign portfolio investment; pooled mean group; stock market.
Capital structure and profitability in a tax-free country: evidence from the UAE
by Imen Tebourbi, Irene Wei Kiong Ting, Qian Long Kweh, Harith Ali Hamood Al Huseini
Abstract: The balance between debt and equity is a key factor explaining profitability. This study examines how capital structure affects the profitability of firms listed on stock exchanges in the United Arab Emirates (UAE), a country that does not have a federal corporate income tax regime. The proxies of capital structure used include total, short-term, and long-term debt ratios, while those of profitability are return on assets and return on equity. Over a 20012016 sample period, this study documents a significantly negative association between capital structure and profitability. This study finds that the negative association is mainly found in companies with a high level of debts. The results of this study not only imply that information asymmetry exists, they also highlight how capital structure and profitability are associated in the context of a corporate tax-free country.
Keywords: capital structure; profitability; debt; information asymmetry; United Arab Emirates.
Asymmetric nonlinear analyses of banking sector behaviour, markets and interest rate risks in Africa's frontier economy
by Augustine Arize, Ebere Ume Kalu, John Malindretos
Abstract: With the possibility of a change in the narrative from the long-held linearity assumption to a nonlinearity and asymmetric discovery in the bank, market and interest rate risk relationship, this paper explores the banks, stock market development and interest rate risk connection in the context of the Nigerian financial system. Empirical evidence arising from the study indicates that bank development exhibits interest rate sensitivity and changes in inverse direction with the interest rate. Moreover, the results strongly support asymmetry and nonlinearity in the relationship between bank development and stock market development. It is therefore recommended that policy efforts directed towards the development of the financial system should strike a balance between the linear/symmetric assumption and the nonlinear/asymmetric assumption.
Keywords: bank development; stock market development; asymmetries; linearity and nonlinearity; NARDL.
Does accounting quality predict corporate cash holdings?
by Rajesh Pathak, Ranajee Ranajee, Ranjan Das Gupta
Abstract: This study empirically examines the role of better accounting quality as a substitute for corporate cash holdings. The paper builds on the premise that if information asymmetry and agency concerns are the justifications for increased corporate cash holdings, better accounting quality, by alleviating these concerns, can enable companies to accumulate less cash, circumventing liquidity concerns. The study uses data for Indian firms during the years 200616 and employs a host of panel models to test the relationship amid the set of idiosyncratic controls and robustness tests. It reports that firms with high discretionary accruals hold high levels of cash, implying poor earnings quality leading to cash accumulation by average Indian firms. Results are highly consistent for alternate measures of accounting quality and cash holdings and are robust to controls of the antecedents of cash holdings and endogeneity issues. Furthermore, analysis of group-affiliated firms compared with their counterparts, for accounting quality and cash holding connect, reveals that while group affiliates suffer from poor earnings quality compared to non-affiliates, it does not have bearings on their cash holdings, a fact that can be attributed to the easy access of group affiliates to internal capital markets. The results imply that managers of Indian firms, on average, should focus on maintaining better accounting quality to alleviate the need to accumulate cash as a means of avoiding fundraising constraints when needed.
Keywords: accounting quality; cash holdings; accruals; business groups.
Certification role of transparency and anchor investors in Indian IPOs
by Sweta Agarwal
Abstract: The study examines the effect of bidding information of anchor and other institutional investors, on retail investors subscription and short-term IPO performance in the Indian market. The study also tries to find out specific characteristics of anchor investors that influence investor decisions. The results show that anchor investors play a certification role for institutional investors only. Both institutional and retail investors follow bids of each other during the book-building period. High institutional and retail subscriptions have a positive effect on initial returns. In anchor-backed IPOs, unique business group participation and anchor over-subscription have a high positive impact on both subscription and IPO initial returns.
Keywords: IPOs; book building process; anchor investors; institutional investors; retail investors; subscription; underpricing.
Determinants of corporate governance disclosures of Islamic banks in Sudan: implications for Shariah governance
by Saed Sulub, Zalailah Salleh, Hafiza Aishah Hashim
Abstract: The paper examines the association between the effectiveness of governance bodies in Islamic banks and Corporate Governance Disclosure (CGD) in a sample of Sudanese banks. We analysed the content of annual reports and employed Ordinary Least Squares (OLS) regression model with pooled effects. Consistent with previous studies in Islamic banks, the findings of this paper revealed low levels of CGD in Islamic banks of Sudan, which is only 39%, on average. The findings showed that Islamic banks with SSB members who hold advanced qualifications provided more information on CGD than their counterparts. However, we found that banks with SSB members who sit on more than one board tend to have lower CGD. In addition, we found that Islamic banks that have an established Audit Committee (AC), Internal Audit Function (IAF) and low levels of governmental ownership have higher CGD levels.These results are robust to alternative empirical models. Our study adds to the ongoing debate of Shariah governance in Islamic banks. In particular, while we support that IAF may play a significant role in Shariah governance as recommended by the regulators of the Islamic banking industry, our evidence shows that SSB multiple directorships, ceteris paribus, are not advantageous for Islamic banks.
Keywords: corporate governance; disclosure; Islamic banks; Shariah governance; Sudan.
Does earnings management impact firm performance? Empirical evidence from India
by Sunil Kumar, NIKHIL Kaushik, Ashutosh Verma
Abstract: The present study examines the association between firm performance and earnings management (EM) of Indian companies. The study used discretionary accruals (DA) as a proxy for EM and measured DA using balance-sheet approach and cash flow approach. DA was estimated using four models, namely Healy model, DeAngelo model, Jones model and Modified Jones model. The sample consists of companies included in the S&P BSE 500 index after excluding banks and financial institutions. The sample period is from 2007 to 2017 and the data is analysed using panel regression. The findings indicate that the relationship is significant and positive in the current year under the balance sheet approach. However, the relationship is significant and negative for the next years performance under the cash flow approach. It indicates that earnings through accruals positively influence the firm performance in the current year. However, when the accruals reverse in the next year and cash flows reduce, there is negative influence on the firm performance.
Keywords: discretionary accruals; balance sheet approach; cash flow approach; firm performance; panel data regression.
Performance of conventional banks versus Islamic banks: evidence from Indonesia
by Nevi Danila, Yousef Shahwan
Abstract: A sound banking system is crucial for the stability of the economy. This paper investigates the determinants of bank performance from the bank-specific and macroeconomic perspective. A fixed-effects model is used to analyse panel data on conventional and Islamic banks from 2010 to 2016. The data reveals that of the top ten private and non-government owned banks, the Islamic bank ranks as the number one performing bank. Macroeconomic variables are the only variables to have an impact on bank performance for both conventional and Islamic banks. While bank-specific variables do not influence performance, operating efficiency was shown to have an impact on Islamic banks.
Keywords: Islamic banks; CAMEL; financial performance index.
Dividend policy and stock price: evidence from Vietnam
by Dinh Bao Ngoc, Nguyen Chi Cuong
Abstract: We investigate the impact of dividend policy on the stock price in Vietnam. Firstly, in order to quantify the immediate effects of dividend policy, 1738 observations of dividend-related events from 403 listed companies during the period 2008 to 2015 are chosen and the event study methodology is used to estimate abnormal returns around the announcement date and the ex-dividend date. Secondly, in order to quantify the long-run impact of dividend policy, panel data derived from 108 listed companies (809 observations) is analysed by using Fixed Effect Model (FEM) and Random Effect Model (REM). Our results show that the effect of dividend announcement on the stock price is positive around the announcement date. For the long-term impact, the results indicate a significantly negative relationship between payout ratio (PAYOUT), dividend per share (DPS) and stock price volatility, and a positive relationship between dividend yield (DY) and stock price volatility of the companies.
Keywords: dividend policy; announcement date; ex-dividend date; stock price; event study.
IAS-24 related party disclosure compliance and corporate governance: evidence from an emerging market
by Ben Agyei-Mensah
Abstract: This paper aims to measure the extent of related party transactions disclosure and investigates their determinants in 110 selected firms in Ghana. An index was manually constructed for related party transactions disclosure in accordance with International Financial Reporting Standards (IFRS) (IAS 24) using company financial statements. Empirical results show high mean compliance level of 63% of related party transactions disclosure in Ghana. Furthermore, the multiple regression analysis (OLS) shows that related party transactions disclosure has significant relationships with block-holders ownership and presence of independent audit committee. This one of the few studies conducted in Sub-Saharan Africa
Keywords: corporate governance; mandatory disclosure; IAS 24; related party transactions; Ghana.
The effect of financial leverage on banks' performance: empirical evidence from a frontier market - the Amman Stock Exchange
by Ahmad Abu-Alkheil, Mohammad Alomari, Balkis Set-Abouha
Abstract: This paper examines the effect of Financial Leverage (FL) on banks' performance by adopting the dynamic Generalized Method of Moments (GMM) estimator over the period 2004-2016. Also, it examines the impact of the recent financial crisis of 2008 on the Jordanian banking industry. The study sample is based on a comprehensive list of listed banks in Amman Stock Exchange (ASE). Findings show that banks' leverage is a significant determinant of banks' performance. FL has negative effects on banks' performance. Mainstream and pure Islamic banks were not immune to the crisis. Yet, Islamic banks seem to show positive signs of recovery from the crisis. Converted Islamic banks did not have better immunity to the global shocks than mainstream banks. Large banks had better financial performance than small banks, and new banks are better able to recover from the adverse effects of the crisis than old ones.
Keywords: GMM; banks' performance; financial leverage; financial crisis; frontier market.
Audit committee and financial reporting quality: the mediating effect of audit price in Nigeria
by Hussaini Bala
Abstract: This study examines the mediating effect of audit price on the link between the audit committee and financial reporting quality. The model was developed based on a complementary hypothesis and employs a panel dataset comprising 440 firm-year observations. Consistent with resource dependence theory, we found that a larger audit committee comprising directors and shareholders is more likely to reduce earnings manipulation in the form of artificial smoothing and managers discretion on earnings. The study also establishes that larger audit committee size is linked to an increase in audit price. Interestingly, we found that an increase in the price of auditing services minimises the likelihood of earnings manipulation. Also, the audit price partially and significantly mediates the link between the audit committee and financial reporting quality. Consistent with institutional theory, our findings provide a causal effect of a complementary hypothesis of audit quality, which proposes that an audit committee should demand better assurance from the external auditors to guarantee effective monitoring of financial reports and to protect capital reputation. The findings of our study will permit stakeholders to comprehend better the importance of audit price in improving the credibility of financial reports, which boosts stakeholders confidence. This study also informs regulators and policy makers of the importance of audit price in limiting earnings manipulation and boosting audit quality, which, in turn, enhances financial reporting quality.
Keywords: audit committee; audit price; income smoothing; financial reporting quality.
The effect of cash flow information asymmetry criteria on conservatism in Iran
by Mahdi Salehi, Horta Azimidarmian
Abstract: The current study aims to investigate the effect of cash flow information asymmetry on conditional and unconditional accounting conservatism of the listed companies on Tehran Stock Exchange. Furthermore, we attempt to explore the determinant factors on these associations. The financial information of 143 firms listed on the Tehran Stock Exchange for the period of 2012 to 2016 is used. In order to assess conditional conservatism, Basus (1997) model has been used, and to evaluate the relationship between conditional asymmetry and cash flow information asymmetry control variables of lifecycle have been added to Basu's model. The results indicate that there is no relationship between conditional conservatism and cash flow information asymmetry as well as firm lifecycle variables, which are used to assess unconditional conservatism, and cash flow information asymmetry. Furthermore, we find no allocative factor on the relationship between accounting conservatism and cash flow information asymmetry.
Keywords: conditional conservatism; unconditional conservatism; firm lifecycle; information asymmetry; cash flow resulting from operating activities.
Directors interests, family control and firm performance: evidence from Hong Kong listed firms
by Ben K.F. Wong, Raymond Wong, Annie H.C. Ko, Raymond Kwong
Abstract: Whether adoption of revised CG (corporate governance) rules and best practices in 2005 has had significant impact on firm performance in Hong Kong is examined through multiple regression models. A conceptual framework is developed and performance is measured on the basis of a comprehensive CGI (corporate governance index) in the post-2005 period. The main findings suggest that CGI has a significantly positive relationship with firm performance and family factors have a relationship with firm performance in some situations. Moreover, there is a changing point at which family ownership (<=23%) or directors interests (<=18.4%) have a significantly positive relationship with firm performance. This study also examines the effect of three family control measures on firm value under five different corporate governance conditions. When the percentage of the number of outside directors on the board is comparatively high, the family control and the family ownership are significantly related to firm value. For board size, the family control and family head are significantly related to firm value when the board has 11 members or less. For firm age, the family control is significantly related to firm value for younger firms. For top five salaries, all family control measures are significantly related to firm value when the five highest salaries are comparatively low. Companies need to increase spending to enhance governance performance (i.e. CGI). It is necessary to boost confidence of the public in information disclosed by companies. Besides, international investors and regulators can refer to results of sample firms which have ADRs listed in the United States. Most Hong Kong listed companies are family controlled but their willingness to reform corporate governance is expected to increase when they see the benefits discussed in this study.
Keywords: corporate governance; corporate governance index; family control; directors’ interests; firm performance.
Impact of audit committee attributes on financial
reporting quality and timeliness: an empirical study
by Ben Agyei-Mensah
Abstract: This paper investigates the impact of audit committee attributes on financial reporting quality and timeliness of listed firms in Ghana. The study uses 90 firm-year observations for the period 2013-2015 for firms listed on the Ghana Stock Exchange. A descriptive analysis was performed to provide the background statistics of the variables examined. This was followed by a regression analysis, which forms the main data analysis. The descriptive statistics indicate that over the four years, the mean value of financial reporting quality is 42% and timeliness of financial reporting is 86 days. The regression analysis results indicate that; financial reporting quality has a statistically positive relationship with audit committee financial expertise and size; audit report lag has a statistically negative relationship with audit committee financial expertise and audit committee independence. This study is one of the few to measure the influence of audit committee characteristics on financial reporting quality and timeliness in Sub-Saharan Africa.
Keywords: corporate governance; audit committee; Ghana; financial reporting quality; timeliness of reporting.
The nexus between reducing audit report lags and divining integrated financial report governance disclosures: should ASE directives be more conspicuous?
by Suzan Abed, Madher Hamadallah, Anan Srouji
Abstract: The purpose of the study is to explore any nexus between Amman Stock Exchange (ASE) Governance required disclosures based on auditors determinants on the audit reporting lag (ARL) in order to construct an Integrated Financial Report (IFR). Audit determinants were revealed by terms of audit meetings, number of audit members, audit opinion, type of audit company, then total assets and bank performance were tested to indicate any non-audit determinants that may affect the disclosure of IFR. Based on Jordanian banks annual financial reports for the years 2014, 2015 and 2016, data is retrieved and analysed. The hypothesised paradigm is tested through multivariate regression to pursue nexuses between the endogenous and exogenous variables. Multivariate analysis revealed a positive nexus between the exogenous variables in the model as a whole and ARL. However, a negative influence of the audit committee number of meetings and type of audit opinion performed on audit reporting lag, where the hypotheses are accepted. Meanwhile, audit committee meetings and type of audit company had a positive effect on the audit reporting lag, all with significant nexus, whereas after testing the control variables in the model, results did not change. Ascertaining innovative determinants that may help decrease ARL by offering explanations to divine the IFR of Jordanian banks, where study results may assist ASE governance committee to focus on the areas unruly disclosed; or needed innovative disclosure. Under corporate and securities laws in Jordan, companies are required to disclose a number of reports based on ASE rules and regulations. As the main objective of disclosing IFR is providing relevant and faithful information to stakeholders, in order to help users to make decisions based on IFR, before it loses its timeliness. So if there is a wide ARL then information will lose its most important significant characteristics, and will be inadequate for crucial decisions to be made by its users. The originality of the paper lies in the structured paradigm, through considering the impact of audit determinants on ARL to support Jordanian bank IFRing. This study contributes to the literature on the nexus between ARL and audit determinants in order to release IFR, by displaying that banks' disclosures based on governance directives are associated with the time lag due by auditors. Understanding such anthologies and explaining them may hopefully help increase the level of sufficiency and assessment of this kind of research.
Keywords: integrated financial reports; audit determinants; audit reporting lag.
Operating performance and earnings management in Egypt
by Wael Mostafa
Abstract: This research contributes to the literature addressing the phenomenon of earnings management in global markets. The research setting is Egypt, and due to data limitations in this setting, this research examines earnings management based on firm operating performance. In particular, the question of whether ineffectively performing firms engage more in earnings management strategies compared to their effectively performing counterparts is investigated. Sign change ratio analysis, correlation analysis, and regression analysis were employed to determine the extent to which the strength of the relationship between earnings and cash flows differs between ineffectively and effectively performing firms. Compared to effectively performing firms, ineffectively performing firms had (a) a higher sign change ratio (that is, the ratio of companies with the opposite signs for cash flows and earnings); (b) a lower correlation coefficient (namely between earnings and cash flows); and (c) a smaller regression coefficient (namely for earnings on cash flows). Therefore, considered against effectively performing firms, ineffectively performing firms in the emerging market of Egypt are associated with a greater level of earnings management. Overall, these results suggest that for listed Egyptian firms, company operating performance is a significant incentive of earnings management. Therefore, the results strengthen the argument in favour of Egyptian corporate governance reform.
Keywords: earnings management; operating performance; earnings; cash flows from operations; Egypt.
On the robustness of the Fama-French three-factor model and the Carhart four-factor model on the Amman Stock Exchange
by Mohammad Q.M. Momani
Abstract: This study aims to explore the robustness of the applicability of the Fama-French and the Carhart asset pricing models on the Amman Stock Exchange (ASE) equity market. It uses data on all companies listed and traded in the ASE, over the period of 2002 to 2018. The study uses the time-series regression approach of Black et al. (1972). To estimate the models, the study applies the ordinary least squares (OLS) method. The study found that the models fail to capture the cross-section of average returns to portfolios sorted on size/book-to-market as well as size/momentum. The ability of the Carhart model in describing the returns to size/book-to-market portfolios is similar to that of the Fama-French model; however, the model better describes the returns to size/momentum portfolios. Unlike Almwalla's (2012) conclusion, this study suggests using the Carhart model in practical applications that require the estimation of the ASE equity market returns.
Keywords: Asset pricing; Fama-French three-factor; Carhart four-factor; ASE; Jordan.
Risk governance and firm value: exploring the hierarchical regression method
by Olayinka Erin, Foluso Aribaba
Abstract: This study examines the impact of risk governance on firm value of 50 listed firms in the Nigerian financial institutions for the period of five years (2013-2017). The study provides empirical evidence which shows that risk governance variables (Enterprise Risk Management_index, Chief Risk Officer_presence, Board Risk Committee_size, Board Risk Committee_activism, and Board Risk Committee_independence) have a positive and significant impact on firm value. Similarly, firm attribute variables (firm size and firm age) have a significant impact on firm value positively while on the contrary corporate governance variables (Board Size and Board of Directors_independence) show a negative but a significant impact on firm value. The empirical evidence observed in this study reveals that the institutionalization of risk culture, strong risk oversight functions and increase in risk accountability by the board have greater tendency to enhance the value of a firm. This study contributes to growing literature in the area of corporate reporting, risk governance and risk management research in Africa.
Keywords: board risk committee; Chief Risk Officer; firm value; Nigerian financial institutions; risk governance; Tobin’s Q.
Active trading strategies based on momentum and term structure signals in commodity futures market: evidence from India.
by Ritika Jaiswal
Abstract: This research designs an active double-sort strategy that integrates momentum and term structure signals present in the commodity futures market. By using a sample of highly traded commodity future contracts of the Indian commodity market from 2006 to 2016, this study confirms the exceptionally high abnormal profitability of the double-sort strategy. The abnormal returns of the double-sort portfolios are robust to transaction costs incurred for designing these active strategies. The application of a conditional multi-factor model and sub-sample analysis suggests that the return profile of these strategies is basically time-varying. Moreover, the low and insignificant correlation of double-sort portfolios with stocks and bonds confirms that relative strength portfolios of commodity futures can be effectively used to create a well-diversified portfolio.
Keywords: commodity futures; momentum strategy; term structure strategies; transaction costs.
Factors influencing the application of fair value of Vietnamese enterprises: an extension study of the theory of planned behaviour
by Lan Nguyen Ngoc, Anh Vu Thi Kim, Phuong Nguyen Thi Thanh
Abstract: This study is based on the theory of planned behavior to understand how the factors of awareness of businesses influence support applying Fair Value (FV) in Vietnamese businesses. Based on the data collected from 558 managements and accountants, we performed the data analysis process. The methods of descriptive statistics, Cronbachs alpha, Exploratory Factor Analysis (EFA) to find the convergence of observed forming new factors, and correlation analysis with binary logistic regression model were used in this study. The results show that: the factor of 'Awareness of challenges in business environment and legal environment' has the greatest influence and negative effects on support applying FV in accounting in Vietnamese businesses whereas the factor of 'Awareness of the benefits of improving financial statement quality' has the second most influence and positive effects on this issue. On the basis of our results, we propose some recommendations for promoting the application of FV in Vietnam
Keywords: behaviour awareness; fair value; support; Vietnam.
On the impact of sentiment on stock returns: the case of Dhaka Stock Exchange
by Shah Saeed Chowdhury, Rashida Sharmin, Arifur Rahman
Abstract: Because frontier markets are dominated by less-informed individual investors, stock price movements of these markets could be related to the sentiment of general investors. This paper investigates the effect of sentiment on the returns of the Dhaka Stock Exchange (DSE), the main stock exchange in Bangladesh. This study uses indirect measures of stock market sentiment. Results show that sentiment impacts contemporaneous returns followed by some corrections in the next month. Contrary to general belief, large firms are more vulnerable to market sentiment. There is a unidirectional (Granger) causality from market turnover to portfolio returns and a strong bi-directional causal relationship between moving average changes and stock returns. When conditional volatility is considered, significant impact of sentiment is mainly observed for small size portfolios. In the presence of other market-wide risk factors, sentiment factors reasonably explain individual stock returns. Overall, in the context of the DSE, the study concludes that sentiment should be considered as a source of systematic risk.
Keywords: market sentiment; behavioral finance; emerging stock markets; Dhaka Stock Exchange; frontier stock markets; return predictability.
Special Issue on: ICMEM 2016 Managing Financial and Investment Opportunities in Emerging Markets
The effect of audit committee characteristics on earnings management: the case of Indonesia
by Doddy Setiawan, Lian Kee Phua, Hong Kok Chee, Irwan Trinugroho
Abstract: We investigate the effectiveness of audit committee in mitigating earnings management in the context of Indonesia. Audit committee is expected to reduce earnings management. This study examines the effect of several audit committee characteristics: independence of audit committee members, number of audit committee members, number of meetings, expertise in finance and gender on earnings management. We study 393 Indonesian listed firms during the 2006-2010 period. Results show that female member(s) of audit committee mitigate earnings management. However, financial expertise and number of meetings have positive effect on earnings management. This result shows that both variables might not be effective to constraint earnings management. On the other hand, number of audit committee members and independence of audit committee member do not have any significant influence on earnings management. Further, this study shows that audit firms and leverage have negative effect on earnings management. However, institutional investors tend to push earnings management higher and growth has no significant effect on earnings management.
Keywords: audit committee; earnings management; financial expertise; gender; number of meetings.
Relationship between debt maturity and IPO: the case of Indonesian firms
by Sarah Aulia Andriana, Yunieta Anny Nainggolan
Abstract: The event of Initial Public Offering (IPO) is a big step in a life cycle of a company, because its the time when the company evolves from being a private to a public firm by adding another source of financing. Numerous researches have studied the effect of IPO on the equity side of financing, whereas the impact on debt financing in the capital structure is not as thoroughly studied, even though debt maturity structure would also be impacted by the decision to go public. It is important to inspect the choice of debt maturity in Indonesias firms for it is found that debt maturity has an important role in emerging markets macroeconomic condition. Based on the literature review, it is expected of companies to take on debt with longer maturity post-IPO because it would be more accessible and beneficial for the newly listed firms. A sample of companies is taken from the list in Indonesia Stock Exchange by using data of companies that have undergone IPO from 2008 to 2011. After the data analysis, it is found that one year and two years after the IPO event affect the choice of debt maturity structure in Indonesia by increasing the use of long-term debt. The statistically significant variables that affect the debt maturity in Indonesian firms besides the IPO+1 and IPO+2 year are found to be the firms asset maturity, leverage, and growth opportunity. The result of this research would be an addition to Indonesias financial literature and give insight on the implication of IPO event to Indonesian firms. It would also be a contribution to studies of capital structure choices in emerging markets.
Keywords: capital structure; debt maturity; leverage; IPO; Indonesia market; corporate finance.
Investigation on leveraging effect of women directors on the board on R&D investment and firms financial performance in the context of developing countries: evidence from Indonesia
by Sita Deliyana Firmialy, Akbar Adhiutama
Abstract: This study examines the leveraging effect of gender diversity, specifically women directors on the Board (WDB), on the relationship between Research and Development (R&D) investment and financial performance. Additionally, the study aims to deepen our understanding of the main behavioral driver of corporate financial performances in Indonesia, one of the fast developing countries within South East Asia. Data from 227 public companies listed on the Indonesian Stock Exchange (IDX) are extracted from their 2015 annual reports and corporate websites. Tobin's Q is employed as the dependent variable, along with R&D investment and WDB as main testing variables. Using regression, the study finds that firms with higher WDB and more focus on their R&D investment activities, will be able to generate better financial performance, than those firms with less gender diversity and R&D investments. This paper contributes to the literature on R&D investment in Indonesia, which is still limited, to the best of the authors' knowledge. The reported findings also uncover the main important finding of leveraging effect of WDB on the relationship between R&D investment and firms financial performance in Indonesia.
Keywords: R&D investment; financial performance; women director on board; moderating effect; developing countries; Indonesia.
Should Indonesia adopt a basket currency regime?
by Ahmad Danu Prasetyo, Camelia Magdalena, Brian Charvia, Mandra Lazuardi Kitri
Abstract: Exchange rate regime is a system in which country used to manage its currency about other currencies and the foreign exchange market. Currently, there are two major types of exchange rate regimes, i.e. free-float system and pegged system. Many countries, including Indonesia, adopted the free-float system since it is believed to be the best regime for absorbing external economic shocks. However, some economists argued that a moderate exchange rate regime, such as currency basket system, is a better approach for achieving the governments goals. The research aims to provide an arrangement for optimal basket weights of Indonesian currency basket to minimize GDP volatility as well as exchange rate volatility. We develop an optimisation model in the extension of Yoshino et al. (2017) by adding five currencies in the basket. We found that the weight currencies in the free-float regime would reflect the trade intensities of the respective countries. Further, the government should monitor the change of exchange rates of currencies in the foreign reserves and change the weight accordingly. In addition, we also found that, whether the government implementing basket currency regime or free-float regime, it will make no significant differential effect on GDP gap volatility.
Keywords: exchange rate regime; basket currency; foreign reserve; GDP gap; exchange rate gap; Indonesia.