International Journal of Banking, Accounting and Finance (26 papers in press)
Basel 3.5 vs Basel III A radical overhaul of the Capital Requirements Pillar The case of commodity exposures
by Adrian Rossignolo
Abstract: Following the implementation of Basel III, the Basel Committee has embarked on a thorough review of its market risk directives and enacted new proposals generically called Basel 3.5. They involve a radical transformation of the Standardised Approach (SA) into a risk-sensitive method and a complete overhaul of the Internal Models Approach (IMA) through the replacement of VaR for ES, amid stringent validation standards. rnThe study analyses Basels recent regulations for commodities exposures, finding a substantial rise in capital levels for SA and IMA and the relatively disadvantageous position in which IMA is placed, arising from the higher SAs capital requirements and the tougher evaluation criteria only attained by schemes featuring Extremes Theory. This, in turn, provokes accuracy disincentives and unnecessary immobilisation of funds.rnConsequently, the paper introduces a straightforward solution designed to level SA and IMA and provide substantial protection against huge market slumps with more reasonable capital levels and reduced implied costs.rn
Keywords: Basel 3.5; Basel III; Standardised Approach; Internal Models Approach; Expected Shortfall; Extreme Value Theory.
Cash flow sensitivities and bank-finance shocks in nonlisted firms
by Charlotte Ostergaard, Amir Sasson, Bent E. Sørensen
Abstract: We study how small firms manage cash flows by estimating cash flow sensitivities for all sources and uses of cash. Our data are Norwegian nonlisted firms which can be matched to the banks they borrow from. Firms with low cash holdings mainly use external finance to offset cash flow fluctuations over the cycle, whereas firms with high cash holdings rely mainly on internal finance. Estimating how cash flow sensitivities change with exogenous bank shocks, we find that the cyclicality of cash-poor firms' investment is amplified because they do not substitute internal for external finance. Our results imply that for small firms, the transmission of financial shocks to the real economy is closely tied to their accumulation of cash.
Keywords: Cash Holdings; Cash Management; SMEs; Cash Flow Sensitivity; Bank Lending Channel.
The Earnings Announcements Consequences in Public Family Firms
by Elisabete Simões Vieira
Abstract: This paper investigates the market reaction to earnings announcements in public family firms, seeing whether these announcements affect firms return, liquidity and cost of capital. We analyse a sample of Portuguese listed firms for the period 2000-2013, using the event study and a panel data approach. Overall, we find no support for the earnings signalling and the efficient market hypotheses. We find no significant differences between family and non-family firms in what concerns performance. Firms size and age contribute positively to the firms performance. Finally, we find no significant relationship between earnings changes and firms liquidity and weighted average cost of capital, giving no support for the pecking order theory. This study is of interest to scholars and practitioners in the finance field, namely the information content of earnings and the differences between listed family and non-family firms in what concerns the earnings announcements effects.
Keywords: earnings announcements; return; liquidity; cost of capital; family firms.
Actively versus Passively Managed Equity ETFs: New Empirical Insights
by GERASIMOS ROMPOTIS
Abstract: This study employs a sample of 37 active and passive ETF pairs investing in common equity stocks to assess their performance and risk up to December 31, 2016. Several return metrics are computed such as absolute, buy-and-hold returns and risk-adjusted returns. Moreover, cross-sectional regression analysis is applied trying to identify the factors that may influence the performance of ETFs. Finally, the ability of managers to time the market is examined. The findings are similar to those in the previous literature. Active ETFs fall short in terms of performance and overall risk when compared their passive counterparts also failing to deliver any material excess-market return. In addition, active ETF managers are lacking in superior market timing skills. Finally, the performance of ETFs is found to be related with expenses and volume in a negative fashion while a positive relationship is revealed between performance and the assets invested in ETFs.
Keywords: ETFs; Active Management; Performance; Market Timing; Expenses.
The propensity to pay dividends: empirical evidence from the MENA region
by Panagiotis Andrikopoulos, Osama El-Ansary, Walid Ibrahim Hassan
Abstract: This paper investigates the relation between stock market sentiment and firms propensity to pay dividends in the MENA region for the period 2000- 2015. Using conventional determinants of cash distributions as control variables, our results show that the tendency to pay dividends is negatively related to the aggregate investors sentiment but positively related to the dividend premium. Unlike prior literature, we report no association between firms dividend policy and issues of stock market liquidity. Overall, we suggest that corporate payout policies in the case of the MENA region can best be explained by the dividend catering hypothesis.
Keywords: Dividends; payout policy; sentiment index; market volatility.
Working Capital Management and Financial Performance of UK Listed Firms: A Contingency Approach
by Ishmael Tingbani
Abstract: Existing empirical research findings generally suggest that working capital management (WCM) affects and the firms financial performance. This paper adopts contingency theory framework to investigate how the relationship between WCM and financial performance is affected by the firms environment, resources and management capability. Our sample consist of an unbalanced panel of 802 firms listed on the London Stock Exchange (LSE) from 2004 to 2014 on which a dynamic panel data analysis was performed using a series of interactive models to estimate the relationship. The findings suggest that the impact of WCM on financial performance changes to reflect number contingency variables such as environmental, resources and management capabilities of the firm. These findings are significant because they demonstrate for the first time how the firms ability to enhance performance through investment in working capital is influenced by contingent factors such as environmental, resource and management capabilities of the firm. Our results are also important as they show that contingency theory helps to provide an understanding on the conditions under which investment in working capital can be an effective tool in enhancing financial performance and the relevant contingencies.
Keywords: Working Capital Management; Financial Performance; Contingency Approach; Interactive Models.
The Dividend Puzzle: Testing the Signalling Hypothesis in an European Context
by Júlio Lobão, Luís Pacheco, Tiago Lajas
Abstract: Dividend policy continues to puzzle researchers in the discipline of finance. In this paper we test the signalling effects of the dividend payout for a set of European firms that had sustained earnings growth for a minimum period of five years with a decline in the last year. To the best of our knowledge this is the first paper to run and compare the results of several different models including the recently created Simultaneous-Equation Model in its linear and nonlinear forms alongside a simple OLS based estimation. Our results show that managers change dividends to signal equity-scaled earnings prospects instead of asset-scaled earnings. We also find evidence that managers change dividends for signalling previous earnings changes and may distribute dividends to reduce agency costs. These findings suggest that managers identify shareholders as the accepters of dividends and the most direct targets to signalling information.
Keywords: Dividends; Signalling Hypothesis; Behavioural Finance.
Split credit ratings of banks in times of crisis
by Surraya Rowe
Abstract: This paper analyses whether opacity of bank creditworthiness increases during crisis periods and if the conservativeness of CRAs changes through business cycles. Univariate and multivariate methodologies are used: data from Moodys and S&P on credit ratings and watch status for 133 commercial banks across 17 developed countries from 2007 to 2015 is employed. The univariate analysis is a unique technique that provides a new perspective to assess whether splits between CRAs are defined as permanent or temporary. The evidence demonstrates that Moodys and S&P frequently disagree. S&P is shown to be the more conservative CRA overall, however, the extent to which Moodys issues higher ratings decreases over time until it becomes the more conservative CRA. The paper is the first of its kind to establish that the conservativeness of Moodys and S&P changes throughout business cycles, which should impact on the strategic decision making of investors.
Keywords: Credit Ratings; Credit Rating Agencies; Split ratings; Watchlist; Banks; Financial crises; Sub-Prime Crisis; Ambiguity; Opacity; Creditworthiness; Time-Weighted Split; Moody’s; Standard and Poors (S&P); Business cycles.
Going-Concern Opinions and Corporate Governance
by Ning Ren, Yun Zhu
Abstract: This paper looks into the issuance of auditors going-concern opinions and investigates how it triggers subsequent changes in corporate governance, specifically, the corporate control, executive compensation and management turnover. Using a difference-in-difference approach with the exogenous shock of Auditing Standard No. 5 (AS5) in 2007, we find that going-concern opinion leads to the decrease in blockholder ownership and institutional ownership, the reduction in CEOs cash compensation and total compensation, and the increase in the turnovers of top executives and auditors, indicating strong monitoring function of the auditors.
Keywords: going-concern opinion; corporate governance; blockholder ownership; institutional ownership; CEO compensation; CEO turnover.
Managerial overconfidence and M&A performance:Evidence from China
by Jie Michael Guo, Jia Liu, QIan He, Jiayuan Xin
Abstract: We examine the extent to which managerial overconfidence creates value to acquirers in successful M&As undertaken by Chinese listed firms in the period of 20062012. The empirical results show that Chinese acquirers gain value in both the shortrun and the longrun after the M&A announcement. Our study provides new evidence that the market responds favorably to M&A deals undertaken by acquirers with more managerial overconfidence in both the short run and the long run. Our multivariate analyses, however, show that managerial overconfidence has a minimal role in explaining the stock price movement. In addition, we find that firm size is an important determinant for the relationship between overconfidence and market reaction to merger deals. Taken together, we conclude that managerial overconfidence has little effect in driving merger and acquisition deals in China.
Keywords: Mergers and Acquisitions; Market Performance; Managerial Overconfidence; Chinese Market.
Market reaction to the European antitrust investigations in the payment card industry
by Francesca Battaglia, Lucia Leonelli, Ornella Ricci
Abstract: This paper aims to analyse the stock price reaction of European banks involved in antitrust authority interventions regarding the payment card business. The main objective is to assess whether market discipline is effective and able to complement regulation (Berger et al., 2000) despite the opacity of the business (Morgan, 2002). To this end, we collect all interventions made by both domestic antitrust authorities and by the European Commission to investigate and/or sanction anticompetitive behaviour in the payment card sector over the period 2004-2015. This results in a sample of 24 events, involving 135 listed banks operating in the EU-27 area. We run an event study analysis based on a traditional market model in order to estimate cumulated abnormal returns (CARs), considering both the date when the formal investigation is open and the date when the outcome of the procedure is communicated to the market. Our findings provide weak evidence in favour of the effectiveness of market discipline, with a significant (negative) market reaction only for investigations involving a small number of well-identified banking institutions, while procedures involving large banking associations or payment networks do not generate any relevant reaction.
Keywords: payments market; payment cards; interchange fees; merchant; cardholders; event study; fines; antitrust authority.
DETERMINANTS OF PRICE STABILIZATION IN INITIAL PUBLIC OFFERINGS
by Antonio Gledson De Carvalho, Joao Amaro De Matos, Douglas Pinheiro
Abstract: We model price stabilisation in IPOs as a sequential decision: syndicate short position (SSP); occurrence of aftermarket short covering (ASC); and intensity of the ASC. We provide empirical evidence that corroborates its predictions. Our analysis is possible because in Brazil underwriters must disclose information on price stabilisation. We innovate by simultaneously modelling the three different decisions. Our model predicts, and empirical results confirm, that the three decisions have distinct determinants: ex-ante demand is the only factor affecting the SSP, and ASC and its intensity increases with the riskiness of the issue, the ex-ante demand, and the underwriters reputation. Our model also innovates by considering the underwriters reputation.
Keywords: IPO; price stabilisation; aftermarket short covering; greenshoe.
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; Data Envelopment Analysis; Efficiency; Emerging Technologies; Credit Risk; Integrated Reporting; Africa.
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; fixed-effects model.
Assessing the Long-Term Impact of Reforms and Privatization on the Banking Industry of Pakistan
by Yaseen Ghulam
Abstract: This study examines the long-term impact of privatization 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 privatized banking firms in particular more productive.
Keywords: TFP; Reforms; Privatization; Technological progress; Input bias; Banking industry; Pakistan.
Profit Change, Bennet-Bowley Productivity and Price Change Indicators
by Rolf Fӓre, Hirofumi Fukuyama, William Weber
Abstract: This paper decomposes a normalized Bennet-Bowley (BB) productivity indicator into indicators of profit change and price change controlling for undesirable jointly produced by-products. An advantage of the method is that each indicator can be calculated using simple accounting data on prices and quantities of inputs and outputs. Furthermore, we extend Walden, Fare and Grosskopf (2017) and aggregate the indicators so that the effects of new entrants, exits and continuing firms on industry profit change can be determined. We calculate each indicator for Japanese banks during 2010--16. Aggregate productivity change is positive during 2010--16 and aggregate profit change is also positive except in 2015--2016. Small banks contributing positively to both profits and productivity. New entrants have a negative impact on industry profits, while exiting banks enhance industry profits.
Keywords: Bennet-Bowley productivity; profit change indicator; Data Envelopment Analysis; Japanese Banks.
The impact of ICT diffusion on sovereign cost of debt
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.
Special Issue on: BAFA-NAG 2016 Contemporary Issues in Finance and Accounting
Determinants of CSR disclosure in Mexico
by Claudia Arena, Yanira Petrides, Petros Vourvachis
Abstract: This paper investigates Corporate Social (and environmental) Responsibility (CSR) disclosure practices in Mexico. It utilises a detailed manual content analysis and identifies corporate governance related determinants of CSR disclosure. The study shows a general association between the governance variables and both the content and the semantic properties of CSR information published by Mexican companies. Whilst an increased international influence on CSR disclosure is noted, the study particularly reveals the symbolic role of CSR committees and the negative influence of foreign ownership on community disclosure, suggesting improvements in business engagement with stakeholders are needed for CSR to be instrumental in business conduct.
Keywords: Corporate Social Responsibility (CSR); CSR disclosure; disclosure determinants; Mexico; corporate governance; legitimacy theory; stakeholder engagement; content analysis.
Did removing prudence from the Conceptual Framework impact accounting conservatism?
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.
Special Issue on: ICAFFI 2016 Finance and Financial Institutions in Emerging Markets
The effect of government involvement and payment method on merger and acquisition performance: the case of China
by Matthias Nnadi
Abstract: This paper applies a sample of 842 to investigate the effect of government involvement and payment methods on merger and acquisition of Chinese listed firms for the period 1993 - 2015. The study employs market model as benchmark to estimate expected returns for several event windows. We find that Chinese acquirer shareholders experience higher returns from the acquisitions in firms with no government involvements than those where government is involved. Our study demonstrates that stock-financed acquisitions maximise the wealth gains of shareholders than cash-backed acquisitions. Our finding further shows that using cash to finance government backed acquisitions yields extra wealth for investors on the announcement date whilst the market experience higher abnormal returns when stocks are used to finance the acquisition of privately held targets. The result of this paper has significant policy implications for both M&A financing decisions and government involvements in merger deals.
Keywords: government; involvement; acquisitions; mergers; performance; abnormal; returns.
An Econometric Investigation of Hedging Performance of Stock Index Futures in Korea: Dynamic versus Static Hedging
by Mohammad Hasan, Toufiq Choudhry, Yuanyuan Zhang
Abstract: Employing daily data of stock index and stock index futures, this paper empirically investigates the hedging effectiveness of time-varying hedge ratios of emerging futures markets using South Korea as a case. This paper employs eight variants of GARCH models to estimate the hedge ratios along with the conventional methods, and compares the hedging effectiveness of these estimated hedge ratios across model specifications using both within-sample and out-of-sample forecasting performances. In contrast to recent research findings, hedging performance based on a conventional OLS method outperforms the GARCH class models.
Keywords: Stock index futures; time-varying hedge ratio; GARCH model; hedging effectiveness.