Int. J. Financial Stud., Volume 5, Issue 4 (December 2017) – 15 articles

The purpose of this study is to examine the impact of social relations among the board members on earnings management in Pakistani listed companies. Specifically, we have analyzed the social networks between CEO and outside board members. The modified Jones model has been used in this study to measure earnings management and we have captured social relations through SOCIAL (Social networking index). Our results suggest that firms with more connected boards show a positive relationship between board independence and earnings management. Further, we have shown that firms with CEO duality exhibit a higher association between social connections of the board and earnings management than firms with non-duality. Social relations among the board members undermine monitoring ability of outside directors and the impact becomes more severe in the presence of CEO duality. Full article

In this work, a Capital Asset Pricing Model (CAPM) with time-varying betas is considered. These betas evolve over time, conditional on financial and non-financial variables. Indeed, the model proposed by Adrian and Franzoni (2009) is adapted to assess the behavior of some selected Brazilian equities. For each equity, several models are fitted, and the best model is chosen based on goodness-of-fit tests and parameters significance. Finally, using the selected dynamic models, VaR (Value-at-Risk) measures are calculated. We can conclude that CAPM with time-varying betas provide less conservative VaR measures than those based on CAPM with static betas or historical VaR. Full article

Over last two decades, emerging and developing nations have desperately endeavored for efficient banking sectors. In this study, we argue that bank efficiency generates incentives that can impact banks’ capital holdings and the cost of financial intermediation. Analyzing a panel dataset of 1190 banks from BRICS (Brazil, Russia, India, China, South Africa) countries over the period 2007–2015, we find robust evidence that more efficient banks hold higher capital and charge lower financial intermediation costs. In an extended sample over the period 2000–2015, we observe that cost efficiency had a marginal positive impact on bank capital during the global financial crisis of 2007–2009. We also observe that on average, banks increased the cost of financial intermediation during the crisis, however, greater efficiency helped banks to not charge higher intermediation costs. Our results imply the beneficial impact of bank efficiency for bank stability and real economy. Full article

The culture of risk is 2000 years old, although the term “risk” developed much later. The culture of merchants making decisions under uncertainty and taking the individual responsibility for the uncertain future started with the Roman “Aleatory Society”, continued with medieval sea merchants, who made business “ad risicum et fortunam”, and sustained to the culture of entrepreneurs in times of industrialisation and dynamic economic changes in the 18th and 19th century. For all long-term commercial relationships, the culture of honourable merchants with personal decision-making and individual responsibility worked well. The successful development of sciences, statistics and engineering within the last 100 years led to the conjecture that men can “construct” an economical system with a pre-defined “clockwork” behaviour. Since probability distributions could be calculated ex-post, an illusion to control risk ex-ante became a pattern in business and banking. Based on the recent experiences with the financial crisis, a “risk culture” should understand that human “Strength of Knowledge” is limited and the “unknown unknown” can materialise. As all decisions and all commercial agreements are made under uncertainty, the culture of honourable merchants is key to achieve trust in long-term economic relations with individual responsibility, flexibility to adapt and resilience against the unknown. Full article

Value investment and growth investment have attracted a large amount of research in recent decades, but most of this research focuses on the U.S. and Europe. This article covers the Thai stock market which has very different characteristics compared to western markets and even South East Asian countries such as Indonesia or Malaysia. Among South East Asian countries, Thailand has one of the most dynamic capital markets. In order to see if some well-known trends in other markets exist in Thailand the performance of value and growth stocks in the Thai market were analyzed for a period of 17 years using existing style indexes (MSCI) as well as creating portfolios using individual stocks. For this entire period, when using the indexes, returns are statistically significant superior for value stocks compared to growth stocks. However, when analyzing the performance of the market in any given calendar year from 1999 to 2016, the results are much more mixed with in fact growth stocks outperforming in several of those years. Interestingly, when building portfolios using criteria such as low P/E or low P/B the results are not statistically different. Suggesting perhaps that the classification into value or growth stocks is more complex than it would appear. One of the common assumptions of value investing is that those stocks outperform over long periods of time. It might well be that in the Thai case one year is not a long enough period for value stocks to outperform. While there have been some clear efforts over recent years to modernize the stock market of Thailand, it remains relatively underdeveloped, particularly when compared to markets such as the U.S. Hence, its behavior regarding value versus growth investment might be rather different. Full article

We present four methods of assessing the diversification potential within a stock market, and two of these are based on principal component analysis. They were applied to the Australian stock exchange for the years 2000 to 2014 and all show a consistent picture. The potential for diversification declined almost monotonically in the three years prior to the 2008 financial crisis, leaving investors poorly diversified at the onset of the Global Financial Crisis. On one of the four measures, the diversification potential declined even further in the 2011 European debt crisis and the American credit downgrade. Full article

In this study, we attempt to identify the asset which has the best hedging characteristics against inflation. We study stock, bond, commodity, real estate and oil indexes. We also study these indexes tracking exchange traded funds (ETFs) to determine the most beneficial tradable asset in addition to the more theoretical index for inflation hedging. We find that, in our sample, oil is the best hedge against inflation, even though three in total are a good hedge—oil, gold and corn—with corn and oil being complete hedges, while gold is a partial hedge. Two assets have conflicting results depending on whether we examine the index or the ETF: the real estate index is a hedge, whereas real estate ETF is the opposite of a hedge. Similarly, the bond index is not related to inflation, whereas bond ETF is the opposite of a hedge. We find that stocks, soy and beef are not hedges against inflation. Full article

To understand the role of green credit in maintaining economic sustainability, we develop theoretical hypotheses including expectation, supervision and capital allocation channels to explain the impacts of green credit. Then, we use hybrid econometric models by using Chinese-listed enterprises in the energy-saving and environmental sectors from 2007 to 2015 as the research sample to verify the above hypotheses. The empirical results show that: (1) the average value of financial performance and operational efficiency is relatively low, and the endogenous abilities of those enterprises have not yet been established; (2) the issuance of green loans does not improve public expectations of enterprises in the green industry, thus the expectation channel is not supported; (3) the issuance of green loans does not necessarily improve the enterprise’s operational efficiency and financial performance, thus the supervision channel hypotheses are not supported; and (4) green loans lead to an increase in financing costs, management costs, operation costs, and expenditure on R&D, thus, the capital allocation hypothesis is partly supported. Based on the empirical analysis, we also provide some countermeasures to strengthen the roles of green credit to support the development of energy-saving and environmental enterprises. Full article

In the aftermath of the European sovereign debt crisis (2009–2014), the management of expectations has risen in importance. However, policy responses have emphasized the management of fiscal spending without examining the impact changes in the business confidence have on the economy. This paper uses a Factor-Augmented Vector Autoregressive specification, which allows for a larger information set covering both domestic and international developments, to measure the responses of five Euro Area economies to a one percent shock in government consumption and business confidence. The evidence suggests that even though the response to a government consumption shock is strong, a shock in expectations has an even greater effect. This points out to the fact that perceptions about the future and trust in the policymaker are much more important than previously considered. Thus, especially in (but not limited to) times of turbulence, or during efforts of stabilization and/or structural reforms, more emphasis should be placed on the overall credibility of the decisions, which could help to mitigate any potential adverse effects from the policies. Full article

The aim of this article is to investigate the explanatory variables of the number of Facebook fans and Twitter followers for professional sports clubs based on the financial value literature. Such explanatory variables are related to local market conditions and on-field and off-field performance. Based upon a sample of North American major league clubs and the most valuable European soccer clubs as evaluated by Forbes over the 2011–2013 period (423 observations), our results indicate a range of variables with a significant positive impact on the number of social media fans: population, no competing team in the market, current sports performance, historical sports performance, facility age, attendance, operating income, expenses/league mean, and being an English football club. An improved understanding of the effectiveness of clubs’ social media presence is important for contemporary sport managers in terms of enhancing supporter communication, involvement, and accountability, as well as maximizing clubs’ revenue generation possibilities. Our findings could help sport managers to realize their clubs’ social media potential in pursuit of these objectives, specifically to understand which variables are under-exploited and why some clubs over-perform, which will allow managers to prioritize decisions to increase their number of social media fans and financial value. Full article

We model a scenario in which there are three types of investors: fundamentalists, speculators, and trend-followers and an intermediary who cares about his reputation. Fundamentalists are rational investors with long horizons who are interested in the dividend stream. Speculators are rational investors who have short horizons and are interested in profiting from short-term price movements or capital gains. Trend-followers are behavioral investors who extrapolate price trends, and, consequently, are late entrants in the market. We show that an informed intermediary (broker) can manipulate demand (consequently stock price) without losing his reputation when there is information asymmetry. We also show that there is a trade-off between broker level competition for reputation and market liquidity. Broker level competition checks manipulation, but it adversely affects market liquidity. Full article

Weather derivatives are contingent claims with payoff based on a pre-specified weather index. Firms exposed to weather risk can transfer it to financial markets via weather derivatives. We develop a utility-based model for pricing baskets of weather derivatives under default risk on the issuer side in over-the-counter markets. In our model, agents maximise the expected utility of their terminal wealth, while they dynamically rebalance their weather portfolios over a finite investment horizon. Using dynamic programming approach, we obtain semi-closed forms for the equilibrium prices of weather derivatives and for the optimal strategies of the agents. We give an example on how to price rainfall derivatives on selected stations in China in the universe of a financial investor and a weather exposed crop insurer. Full article

This study examines the market-timing performance of Chinese equity securities investment funds during the period from May 2003 to May 2014 using the parametric tests of Treynor–Mazuy and Henriksson–Merton as well as the Jiang non-parametric test. Based on the non-parametric approach, the study finds that only one fund among the sample of 419 funds possessed statistically significant market-timing skill, while 9% of the funds were statistically significant negative market timers. Most funds do not time the market. This conclusion is robust when controlling for publicly available information in evaluating ‘private’ timing ability. Consistent with studies of other markets such as the UK, a higher prevalence of successful market timers is found by the Treynor–Mazuy and Henriksson–Merton methods compared to the non-parametric procedure. Full article

This study uses the Bayesian approach to examine the incremental contribution of stock characteristics to the investment opportunity set in U.K. stock returns. The paper finds that size, book-to-market (BM) ratio, and momentum characteristics all make a significant incremental contribution to the investment opportunity set when there is unrestricted short selling. However, no short selling constraints eliminate the incremental contribution of the size and BM characteristics, but not the momentum characteristic. The use of additional stock characteristics such as stock issues, accruals, profitability, and asset growth leads to a significant incremental contribution beyond the size, BM, and momentum characteristics when there is unrestricted short selling, but no short selling constraints largely eliminates the incremental contribution of the additional characteristics. Full article

The present study explores the effect of the gambler’s fallacy on stock trading volumes. I hypothesize that if a stock’s price rises (falls) during a number of consecutive trading days, then the gambler’s fallacy may cause at least some of the investors to expect that the stock’s price “has” to subsequently fall (rise), and thus, to increase their willingness to sell (buy) the stock, resulting in a stronger degree of disagreement between the investors and a higher-than-usual stock trading volume on the first day when the stock’s price indeed falls (rises). Employing a large sample of daily price and trading volume data, I document that following relatively long sequences of the same-sign stock returns, on the days when the sign is reversed, the trading activity in the respective stocks is abnormally high. Moreover, average abnormal trading volumes gradually and significantly increase with the length of the preceding return sequence. The effect is slightly more pronounced following the sequences of negative stock returns, and remains significant after controlling for other potentially influential factors, including contemporaneous and lagged actual and absolute stock returns, historical stock returns and volatilities, and company-specific events, such as earnings announcements and dividend payments. Full article