International Journal of Banking, Accounting and Finance
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International Journal of Banking, Accounting and Finance (17 papers in press)
Special Issue on: ICAFFI 2016 Finance and Financial Institutions in Emerging Markets
Abstract: In this paper, we aim to examine the efficiency of commodity markets in India by resorting to a rigorous econometric model, namely the cost-of-carry model. By underscoring the need to establish a relationship between the futures and spot markets (given that they depict a time-series behaviour), the proposed model is better positioned to perform the empirical examination of market efficiency when compared to alternative models (such as the variance-ratio test, Jarque-Bera test, and runs test, among others) that have traditionally relied upon the observed behaviour of spot prices alone to achieve the set objective. A review of the existing literature points towards a lack of studies that use statistically robust models, such as cointegration regression, to assess the efficiency of commodity markets in emerging economies; this further posits a compelling motivation to undertake the present study. This is particularly true for emerging markets like India, where prices of commodities with their associated impact on inflation always posit a politically sensitive scenario. In the wake of the National Spot Exchange of India (NSEI) scandal, the popular sentiment (however unscientific) surrounding the impact of futures trading on spot prices needs to be investigated thoroughly, and this constitutes the main motivation of the paper. Consequently, the most appropriate methodology to carry out the investigation is the cost-of-carry model, which postulates a theoretically established empirical relationship between the futures and spot prices. We reject the hypothesis surrounding market efficiency by employing the cost-of-carry model using both single hypothesis and joint hypothesis testing, depicting weak evidence of market efficiency.
Keywords: Commodity Markets; Market Efficiency; Cointegration Regression; Cost-of-carry.
by Apostolos Kotzinos, Dimitrios Psychoyios, Nikolaos Vlastakis
Abstract: We examine the effect of a countrys level of information and communication technologies (ICT) diffusion on its credit rating and cost of debt. ICT diffusion is approximated using the Networked Readiness Index, which is designed to capture a countrys capacity and preparedness to participate in the digital economy. We adopt a modified random effects approach which allows us to distinguish between short and long run effects on a dataset of 65 countries for a time span of ten years. We show that ICT have a significant impact on a countrys credit rating and cost of debt which is robust to the presence of other variables proposed in the literature. The effect is stronger for non-OECD countries, indicating a pathway for developing countries to improve their access to debt markets. Our conclusions are robust to the advent of the recent financial crisis.
Keywords: Credit ratings; Sovereign debt; Information and Communication Technologies; E-readiness; Developing countries.
The relevance of annual general meetings: recent evidence from the UK
by Tolulola Lawal
Abstract: Using over 14,000 hand-collected annual general meeting dates of UK firms over the period 2004 to 2014, the study provides some evidence in support of the information content hypothesis from the analysis of price and volume reactions around annual general meetings. In addition, the study finds some support for an increase in the information content of annual general meetings during the study period. Our results show that both the magnitude of abnormal return and the temporal variation in the information content of annual general meetings depend on a number of firm characteristics that capture firms information environment.
Keywords: corporate governance; annual general meetings; information content hypothesis; event study; abnormal return; abnormal volume; UK; United Kingdom.
Nurturing regional innovation: the effects of bank competition in U.S
by Lin Tian, Liang Han
Abstract: Whilst corporate innovation is one of the key drivers of regional economic growth, question remains over how regional corporate activities are affected by local banking market structure. By attaching regional corporate innovation activities to a market power hypothesis, this paper examines (1) if regional innovation activities would benefit from the improved banking market competition and (2) the variation of banking market competition effects on innovation outputs over unique regional characteristics, such as state-level R&D intensity and distribution of innovation activities. Using patent and citation data and local bank data from 51 states in U.S between 1992 and 2004, we show that improved local banking market competition increases both the quantity (patents) and quality (citations) of regional innovation outputs. It is also found that such a favourable effect on regional innovation is especially stronger for those states with low R&D intensity and those with more concentrated innovation activities.
Keywords: Regional innovation; Banking market; R&D intensity;.
Corporate Bonds, Exchange Rates and Business Strategy
by Konstantina Vartholomatou, Konstantina Pendaraki, Athanasios Tsagkanos
Abstract: We examine the relationship between corporate bonds and exchange rate in USA and Greece highlighting asymmetries and volatility among markets. A theoretical framework is constructed to treat the issue of corporate bonds. We employ the QARDL-ECM in line with existing empirical studies. This is applied in nonstationary regressors. In Greece, we find that changes in corporate bonds are mainly driven by changes in exchange rate. The quantile estimates show that the strength of long-run relationship increases as the risk of default for the country diminishes. In USA, both long-run and short-run relationship between variables is defined. The changes in exchange rate are mainly driven by changes in corporate bonds. The quantile estimates exhibit a non-symmetrical pattern of the relationship which is an evidence of possible financing problems in enterprises. We suggest a sound policy for enterprises in order to attain stable growth into an environment of financial stress and asymmetry.
Keywords: corporate bonds; exchange rate; asymmetry; QARDL-ECM.
Is the Era of the Day-of-the-Week Anomaly Over?
by Ngan Duong Cao, Vu Quang Trinh, Thanh Quoc Nguyen
Abstract: While an extensive body of literature has investigated the existence of the day-of-the-week anomaly in different stock markets globally, their findings can only provide implications for potential arbitrage opportunities for domestic investors in the investigated markets. We, therefore, add to these studies by investigating the possibility of international arbitrage activities using such an anomaly, after accounting for currency risk. Initially, we re-confirm the disappearance of the effect in the US market (S&P500), implying that US domestic investors can no longer exploit the day-of-the-week trading strategy in their home market. Further, we test whether investors who use the US dollar as the main trading currency (including US investors) can exploit the anomaly in foreign markets. We employ the daily values of representative indices and the national currencies of the three ASEAN countries (Singapore, Thailand and Malaysia) from 1995 to 2014. We find that the anomaly is evident in all three markets and can be exploited by foreign investors. Furthermore, the Thai exchange is the best investment destination for foreign investors with the highest returns and lowest currency risk. The profitability of this trading strategy is independent of economic activities and significantly dependent on the performance and conditions of the financial markets.
Keywords: stock exchange; anomaly; ASEAN markets; arbitrage; international investment; recession; financial crisis.
Bank Risk and Charter Value: The Role of Opacity
by Chris Brune, Kevin Lee, Scott Miller
Abstract: In this paper we explore the linkage between bank opacity and bank charter value. We find that opacity contaminates charter value and therefore reduces the ability of charter value to restrain risk-taking in banking. As bank assets become more complex and opaque with the increased use of derivative assets like mortgage backed securities, asset backed securities, and collateralized debt obligations, etc., it becomes more difficult to gauge the true value of banks and the true risk of the bank activities.
Keywords: Banks; Opacity; Charter Value; Market Discipline; Financial Crisis.
The CEO Identity of Sovereign Wealth Funds and Target Firms Performance
by Alfonso Del Giudice
Abstract: The impact of sovereign wealth funds (SWFs) on target firms performance is unclear. Previous empirical studies find conflicting evidence, with some documenting a positive impact and others finding a negative impact on target firms performance. In contrast to previous researchers, we include in the sample both listed and unlisted targets and reconsider the classification of political influence on SWF managerial decisions, observing the identity of the CEO rather than using the Truman score. We identify a political CEO as such if s/he is a political officer or a former political officer or if s/he belongs to the same family as a political officer. Using a sample of 226 deals, we find evidence of an impact of SWF investments on target firms performance. The presence of a political CEO has a positive impact on target firms profitability, showing that closer ties to political power play an important role.
Keywords: sovereign wealth fund; political connection; target firm performance.
Forecasting the Yield Curve with Macroeconomic Information - Evidence from European Markets
by Isabel Maldonado, Carlos Pinho, Francisco Rodríguez De Prado, Carla Lobo
Abstract: In this paper we analyse the predictive content of the introduction of macroeconomic variables in term structure dynamic models. We tested the dynamic models using data from the public debt, inflation rate and annual variation of the industrial production index for four European countries: Portugal, Spain, the United Kingdom and Germany. Results obtained for the period from January 1990 to December 2012 indicate that considering macroeconomic factors makes a positive contribution to the improvement of forecasts for different countries and maturities. However, the paper presents evidence of time-varying forecast accuracy, not only across yield maturities and forecast horizons, but also over data subperiods.
Keywords: Yield curve; Dynamic factor models; Forecasting.
Dependence between Islamic banks and conventional banks and risk factors
by Chakroun Mohamed Amin, Gallali Mohamed Imen
Abstract: This study aims to identify the risk factors amplifying the contagion risk between the Islamic to conventional banks. Using the Copula approach and the panel VAR model, findings justifies the presence of a dependent relationship between the two types of banks, where the sense of causality of this phenomenon is unidirectional derived from conventional to Islamic banks. Hence, our results indicate that the market risk, the credit risk and the size of the financial institution represent the major factors triggering the contagion risk between both types of banks. To this extent, the Islamic banks should consider more restricted standards to be able to ensure their independence and to handle their contagion risk.
Keywords: Islamic finance; Contagion; systemic risk; Copula; MES; GJR-DCC; Panel VAR.
Accruals Quality and Analyst Forecast Accuracy: Evidence from the Property-Casualty Insurance Industry
by In Song
Abstract: This paper examines the association between property-casualty insurer accruals quality and analysts earnings forecasts (i.e., accuracy and dispersion of forecasts). Using insurer-specific accruals, loss reserves, we calculate accruals quality which can be decomposed into its innate and discretionary components. Our results provide evidence that higher accruals qualityas measured by low standard deviation of loss reserve errorsis positively associated with analysts forecast accuracy. In other words, our results suggest that analysts provide less accurate forecasts for firms with higher reserve error volatility. Also, we show that lower accruals quality is associated with higher forecast dispersion indicating more disagreement among analysts. Our results hold consistent with decomposed components of accruals, innate and discretionary, and conclude that both managerial discretion and basic operations of firms affect insurers analysts earnings forecasts.
Keywords: Insurance; Earning Management; Loss Reserves; Loss Reserve Error volatility; Managerial Discretion; Accruals Quality; Analyst forecast; Earnings forecast; Property-Casualty Insurers.
Borrowers Perceptions of Lending Conditions: Worlds Apart or Closer than Close?
by Dimitrios Anastasiou, Konstantinos Drakos
Abstract: Given that lenders and borrowers interact in the same (credit) market, an interesting research question that arises is whether the demand side of the market correctly comprehends the actual credit market conditions that are primarily shaped by the supply side. We explore this by utilizing available surveys conducted separately for the two sides of the credit market and empirically investigate whether, and by which mechanism, demand-side perceptions relate to supply-side credit conditions. Our results indicate that demand-side perceptions do not match one-for-one supply-side conditions, but are rather described by an adaptive mechanism. This mechanism suggests that demand-side perceptions are modified every period by a fraction of last periods perception error. Additionally, we find that demand-side perceptions systematically overshoot the actual conditions, and this overshooting is accentuated for periphery countries and smaller firms.
Keywords: Loan Terms and Conditions; Bank Lending Conditions; Bank Lending Survey; Survey of Access to Finance; Borrowers’ Perceptions.
Impact of intellectual capital on bank efficiency in emerging markets: evidence from Ghana
by Joseph Mensah Onumah, King Carl Tornam Duho
Abstract: Various researchers have examined the relationship between intellectual capital (IC) and performance of banks. Yet, only few studies have examined the nexus between IC and bank efficiency especially in Africa. Using the VAIC™ model of Pulic (2000) [and its additive components human capital efficiency (HCE), structural capital efficiency (SCE) and capital employed efficiency (CEE)] to measure IC and data envelopment analysis to estimate efficiency scores, the current study used Ghanaian data of 32 banks from 2000 to 2015 to examine the nexus. The study found that risk-adjusted efficiency scores are higher than non-risk adjusted scores. There is evidence suggesting that IC instigates efficiency in banks. This is borne largely from HCE suggesting the prevalence of the human capital theory. The results of the impact of SCE and CEE are insignificant except for the significant positive impact of CEE on profit efficiency. Stock exchange listing increases efficiency scores especially risk-adjusted efficiency. Other exogenous variables such as size, leverage and concentration were controlled for with the results discussed into detail. The results have implications for bank regulation, bank management and future research.
Keywords: intellectual capital; human capital; VAIC™ banking accounting finance; data envelopment analysis; DEA; technical efficiency; cost efficiency; profit efficiency; emerging technologies; isotonicity; credit risk; integrated reporting; Africa; Ghana.
Assessing the long-term impact of reforms and privatisation on the banking industry of Pakistan
by Yaseen Ghulam
Abstract: This study examines the long-term impact of privatisation and broader reforms of the banking industry in Pakistan over a quarter of a century. We conclude that following the reforms and changes of ownership, as expected, banking firms made an adjustment to their input usage by switching from labour saving to labour using after the reforms, but vice versa for purchased funds. Simple descriptive statistics of the productivity estimates reveal that banking firms did not experience any improvement in productivity (medium-sized and private firms in particular). Operating nationwide has a clear advantage in terms of productivity growth compared, with operating only in urban centres with a limited number of branches. More importantly, when the productivity estimates are regressed on a number of explanatory variables to control for bank-specific factors and the economic, financial, industrial and political environment, we conclude that the reforms and changes of ownership have indeed made privatised banking firms in particular more productive.
Keywords: total factor productivity; TFP; reforms; privatisation; technological progress; input bias; banking industry; Pakistan.
Bank diversification and entrepreneurship: evidence across US states
by Amit Ghosh
Abstract: Although a sizeable literature has examined the impact of income diversification on risk and return, the implication of banks diversification on entrepreneurial activities has not yet been studied. Using state-level data for the US spanning the period 1977-2014, the present study examines the impact of banks asset, income and funding diversification on different facets of entrepreneurial activities. We find banks asset and funding diversification to promote net business formation and net job creation. Additionally, bank profitability, deposit growth, as well as state-level personal income and housing price growth foster entrepreneurship.
Keywords: entrepreneurship; bank diversification; Herfindahl-Hirshman index; net business formation; net job creation; state-level analysis; panel estimations; USA.
Profit change, Bennet-Bowley productivity and price change indicators
by Rolf Färe, Hirofumi Fukuyama, William L. Weber
Abstract: This paper decomposes a normalised Bennet-Bowley (BB) productivity indicator into indicators of profit change and price change. An advantage of the method is that each indicator is calculated by substituting observed prices and quantities of inputs and outputs into a simple accounting formula. We extend Walden et al. (2017) and aggregate the indicators and account for the effects of new entrants, exits and continuing firms on profit change. We calculate each indicator for Japanese city banks, regional banks and Japan Post Bank during 2010-2016. Banking experiences productivity growth during 2010-2016 and profit change is also positive except during 2010-2011 and 2013-2014, when adverse price changes more than offset productivity growth. Regional banks make a greater contribution to increases in profits and productivity than city banks. Japan Post Bank experiences productivity decline throughout the period new entrants reduce industry profits, while exiting banks increase industry profits. Decreases in non-performing loans during the period contributed to increased profitability and productivity.
Keywords: Bennet-Bowley productivity; profit change; DEA; Japanese banks.
Special Issue on: BAFA-NAG 2016 Contemporary Issues in Finance and Accounting
by Elaine Conway
Abstract: The International Accounting Standards Board (IASB) removed explicit reference to the concept of prudence within the conceptual framework (CF) with effect from September 2010. This paper examines whether practitioner concerns that the removal of prudence might lead to a decrease in accounting conservatism and an increase in earnings management or overstated results were justified. It takes a sample of firms from the UK FTSE350, Australian ASX 300 and the South African JALSH (Johannesburg All Share) and evaluates three popular measures of accounting conservatism over the fourteen-year period of 2003-2016 (seven years pre and post the removal of prudence from the CF). The measures of accounting conservatism used were asymmetric timeliness of earnings, market-to-book ratio and total/non-operating accruals. Using all three measures, there was no evidence that the level of accounting conservatism has reduced during the period following the removal of prudence in the CF in those countries using IFRS. Despite this, the debate around prudence has continued and the IASB has since decided to reinstate it in the 2018 revised CF, effective 1 January 2020.
Keywords: conceptual framework; prudence; accounting conservatism; conditional conservatism; unconditional conservatism; IFRS.