International Journal of Banking, Accounting and Finance (24 papers in press)
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.
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.
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.
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.
Working capital management and financial performance of UK listed firms: a contingency approach
by Ishmael Tingbani, Venancio Tauringana, Isaac Sakyi Damoah, Widin Bongasu Sha'ven
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; WCM; financial performance; contingency approach; interactive models.
The dividend puzzle: testing the signalling hypothesis in a 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; European firms; simultaneous-equation model.
An econometric investigation of hedging performance of stock index futures in Korea: dynamic versus static hedging
by Mohammad Hasan, Taufiq 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; Korea.
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 Moody's 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 Moody's and S&P frequently disagree. S&P is shown to be the more conservative CRA overall, however, the extent to which Moody's 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 Moody's 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 splits; Moody's; S&P; times of crisis; European sovereign crisis.
Going-concern opinions and corporate governance
by Ning Ren, Yun Zhu
Abstract: This paper looks into the issuance of auditor's 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 CEO's 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, Qian He, Jiayuan Xin, Jia Liu
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 2006-2012. The empirical results show that Chinese acquirers gain value in both the short-run and the long-run after the M&A announcement. Our study provides new evidence that the market responds favourably 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; M&As; market performance; managerial overconfidence; Chinese market; China.
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 stabilisation in initial public offerings
by Antonio Gledson De Carvalho, João Amaro De Matos, Douglas Beserra 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 underwriter's reputation. Our model also innovates by considering the underwriter's reputation.
Keywords: IPO; price stabilisation; aftermarket short covering; greenshoe.
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. By analysing a sample of Mexican companies in 2010, 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. Although an increased international influence on CSR disclosure is noted, the study reveals the symbolic role of CSR committees and the negative influence of foreign ownership on community disclosure, suggesting that improvements in business engagement with stakeholders are needed for CSR to be instrumental in business conduct.
Keywords: corporate social responsibility; CSR; CSR disclosure; disclosure determinants; Mexico; corporate governance; legitimacy theory; stakeholder engagement; content analysis.
Special Issue on: ICAFFI 2016 Finance and Financial Institutions in Emerging Markets
The effect of government involvement and payment method on merger and acquisition performance: the case of China
by Matthias Nnadi, Evgeniia Volokitina, Daniel Aghanya
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: mergers; performance; acquisition; Chinese; returns; government; China.