International Journal of Financial Studies

This study investigated four factors affecting internal audit effectiveness in Vietnam, namely, independence of internal audit, the competence of internal auditors, management support for internal audit, and quality of internal audit work. Quantitative and qualitative evaluations were conducted, including a logistics regression model and other analyses, using SPSS software. Through semi-structured in-depth interviews and an online survey, 144 responses were obtained from internal Vietnamese auditors of nonfinancial companies listed on the Vietnamese stock market in 2021. After processing the data, the results revealed two factors (independence of internal auditor and management support for internal audit) with a positive influence on internal audit effectiveness, whereas the competence of internal auditors and quality of internal audit work did not affect internal audit effectiveness. Full article

The present study investigates a conceptual research framework on financial literacy in various investment planning and decision-making stages. The study comprises a review of 2182 articles published in peer-reviewed journals from 2001 to 2022 (January). The study employed bibliometric techniques such as citation network analysis, co-citation analysis, content analysis, publication trends, and keyword analysis to analyze the literature on financial literacy. The study aims to add to the literature on financial literacy by proposing ten clusters to improve research on financial literacy in order to help investors learn better. Financial literacy has evolved from a fledgling discipline to a significant teaching and research tool. Therefore, it is vital to investigate and identify current research trends in this field. The results are essential to the financial community, given that institutions and society are increasingly emphasizing financial literacy to strengthen individual citizens’ responsibilities in designing their investment strategies. Full article

This paper examines the relationship between generational differences, risk tolerance, and attitudes towards financial investments in a nationally representative sample from the United States of America. The sample consists of pooled cross-sectional data of three waves (2012–2018) and 80,000 observations from the National Financial Capability Study (NFCS). Using a probit model (with and without sample selection), all of the predictor variables are estimated to have statistically significant effects on the ownership of financial securities, with the expected sign effects. There is clearly a generational cohort effect, whereby Baby Boomers are on average more likely to own financial investments than Millennials, controlling for other factors such as incomes, education, and financial literacy. Generation Xers are statistically less likely to have investments in financial securities compared to Millennials. In general, Baby Boomers are more risk-averse and Generation Xers are more risk-loving than Millennials, accounting for education and income levels. The paper reveals a conundrum in which Baby Boomers (Gen Xers), although more (less) risk-averse, are more (less) likely to own financial securities. We control for reverse causality (endogeneity) in the relationship between risk tolerance and the ownership of securities, using the bivariate probit model. The level of financial knowledge of respondents correlates highly with asset ownership: individuals with high and medium levels of financial knowledge are more likely to own financial assets than those with low levels of financial knowledge. To address the limitations of the current findings with regard to generational attitudes towards financial investments, further research is recommended. Full article

This study examines the relationship between corporate managers’ political ideology and corporate leverage policies conditional on investor sentiment. Based on a minimum of 21,884 observations over the 1992–2008 period, the authors show that Republican managers significantly reduce leverage during periods of high investor sentiment. To the best of the authors’ knowledge, this paper is the first to document that Republican managers are not swayed by the general tendency to increase leverage in high-sentiment periods. Overall, the empirical evidence from this study indicates that personal characteristics of managers have a consistent impact on corporate policies, providing support for the “behavioral consistency” theory. Further, the results of this study imply that internal and external stakeholders of a corporation should take into account manager personality in their decisions. For example, the board of a highly indebted company may consider hiring a conservative manager to reduce its financial risk. Full article

Since the adoption of the SEC’s Rule 10b-21 in 1988, many researchers have been concerned over the effectiveness of short sales constraints in preventing manipulative trading in the derivatives market. We analyze whether options can be used as synthetic short sale instruments to manipulate stock prices before a seasoned equity offer. Due to the existence of strict short sales constraints in the equity market and market makers’ anticipation of manipulative trading, it would be very costly for a manipulator to drive stock prices down artificially either by short selling in the equity market or by using synthetic short sales in the options market. Using a sample of 237 firms that issued SEOs on the NYSE and had options listed on any U.S. options exchange from April 2002 to December 2004, we show that potential manipulators in the options market tend to use put options as a trading vehicle during the SEO’s pre-offer period. The results of our empirical tests support the predictions of our model. Full article

This study explores the effect of corporate governance on financial innovation and the effect of financial innovation on performance in Taiwan’s banking industry from 2011 to 2019. The results find that the banks have higher shareholding of institutional investors, ratio of independent directors, attendance rate of directors, average education level of directors and more directors with a financial or accounting background, the greater innovative financial services offered by banks. After 2015, the impact of corporate governance on banks’ innovative financial services has increased. Moreover, the greater financial innovation services, the higher the bank profitability and value, especially after 2015. Finally, offering more innovative financial services can enhance the value of financial-holding subsidiary banks; by contrast, doing the same might negatively affect the profitability of nonfinancial-holding banks. Full article

This paper explores the role of social capital in contributing to the success of a new breed of organizations known as ‘blank check companies’ or special purpose acquisition companies (SPACs) that are set up solely to target and acquire listed companies as a fast-track route to gain listing status in the stock market. The paper is a case study of Pershing Square Holdings Ltd., St. Peter Port, UK (PSH), which launched SPAC IPOs (Initial Public Offerings), Pershing Square Tontine Holdings Ltd., New York, NY, USA (PSTH), which succeeded in raising the largest capital from influential investors in 2020. Social capital theory is employed to provide theoretical structure for the analysis. Using annual reports, publicly available information on the internet, as well as social media platforms related to the company and its strategy, the authors critically analyse and highlight how the Tontine’s founder and his team utilized their structural, relational, and cognitive social capital to attract investors and gained recognition as the most successful SPAC IPO in the market in 2020. The authors found the ability to structure a SPAC IPO that departs from a typical SPAC, and the choice of timing to enter the SPAC market resulted in an over subscription and higher market valuation ratings of its IPO, as well as allowed the sponsor to be selective of its investors. This is the first study to address the significance of social capital at the individual and organizational level in creating value for SPAC IPOs. Potential investors can gain understanding and insights on the mechanics of SPAC IPOs and the importance of the founder’s social capital in ensuring successful investment. Successful SPAC IPOs will create interest in the marketplace and enhance the value of investment for investors and helped private companies to get listed faster. Full article

In response to relatively little evidence on the determinants of the financial distress in cooperative financial institutions (e.g., Credit Unions), this paper proposes a distress indicator of Merton Distance to default (Merton DD), which was constructed with a z-score, possessed improved predictive capability, but reducing equity volatility. This model possesses the advantages of both hazard and modified Merton DD model, which could timely reflect market volatility and predict when distress would occur. As a demonstration, we applied this model to forecast the financial distress of credit unions in Taiwan. The results can provide more information to researchers. Full article

The aim of this paper is to find a dynamic framework of analysis of credit union movements by grouping credit unions into different category types. Within the heterogeneous reality of the worldwide credit union movement, the typology provides a clearer understanding of the dynamics of change and development. We use panel-ordered logistic regression to find the key covariates of influence when analyzing the original typology to add further explanation of the development of credit union movements. By using transnational research, we revisit each of the three categories of the original typology to re-evaluate and expand upon the relevance of this particular model. We also include the elements of economy, society, education, and culture in other countries in this research. Our findings suggest that the stage of development of the credit union movement depends on the variables of asset scale, financial crisis, legislative framework, economy, society, and culture of the country. In addition, they indicate that the penetration rate of the credit union movement depends on the asset scale, loan ratio, credit union growth, financial crisis, economy, society, education, and culture of the country. This lends support to the recognition of the diversity of the credit unions’ development. Full article

This paper investigates the robustness of the conventional mean-variance (MV) optimization model by making two adjustments within the MV formulation. First, the portfolio selection based on a behavioral decision-making theory that encapsulates the MV statistics and investors psychology. The second aspect involves capturing the portfolio asset dependence structure through copula. Using the behavioral MV (BMV) and the copula behavioral MV (CBMV), the results show that stocks with lower behavioral scores outperform counterpart portfolios with higher behavioral scores. On the other hand, in the Forex market, the reverse is observed for the BMV approach, while the CBMV remains consistent. Full article

During the past two decades, financial markets across the globe have experienced sporadic waves of crashes. Such waves raise concerns about the vulnerability of global financial markets and the transmission mechanisms of shocks beyond borders. The current study examines the co-movement of stock markets in BRICS (Brazil, Russia, India, China and South Africa) countries and the United States of America (US). It unfolds their exposure to contagion effects during the major financial crises, which have flared up since 2000. Daily close price indices of selected stock markets were used in this endeavour. These data spanned from 5 January 2000 to 10 March 2021. A wavelet decomposition on stock return series was performed on these data to determine the multihorizon nature of comovement (pure contagion or interdependence) and the dynamics of market integration. It emerges that before the 2006-US-housing-bubble and after the 2011/13-EU-sovereign-debt crises, some shocks caused pure contagion. Such transmission generated short-term shocks. Most of the earlier shocks, particularly the US subprime and the EU Sovereign Debt crises, were spread via interdependence. Trade linkages and economic integration improvements enhanced such interdependence. In addition, when analysing the episodes of market integration, it arises that, in general, the short- and long-term integration strengthened and deepened comovement among equity markets. From the portfolio diversification and risk management perspectives, these results indicate that the market in China provided lucrative grounds for short-run investors from the other countries covered in the current study. These results can be helpful for investors interested in portfolio diversification in the BRICS region. They might also help policymakers in the region mitigate the exposure to external shocks of markets. Full article

Cultural distance (CD) is an important driver of foreign expansion strategy at the firm level. However, its effects can be more or less significant depending on the contextual characteristics of the host country, such as the quality of formal institutions and the openness to international trade. Therefore, it is argued that strong formal institutions in the host country can effectively reduce the adverse impact of CD. Additionally, due to the more frequent interactions with foreign cultures, countries open to foreign trade can positively accommodate the effects of CD. The study tests these assumptions using data from the Orbis database and the World Bank and finds a reduction in the adverse impact of CD on the financial performance of foreign subsidiary firms with robust formal institutions in the host country. Moreover, the negative effects of CD increase with higher degrees of trade openness. Thus, the results indicate that foreign subsidiary firms operating in host countries that are more open to foreign trade will have to conform to the higher expectations from the local culture. Full article

We analyze the interaction between management and investors during Chinese IPO roadshows through Jaccard Similarity analysis of written Chinese logograms. We provide evidence that when agreement is high, investor optimism increases, leading to relatively large first-day underpricing. We further show that high agreement biases investors to systematically overestimate IPO prospects leading to poor long-run abnormal performance. Jaccard Similarity is different from current content analysis methodologies because it is language and culture agnostic, requiring no a priori construction of thematic dictionaries. Elimination of such dictionaries removes the danger that the researcher has imposed predispositions upon the study. Full article

This paper attempted to apply an EVT-based pairwise copula method for modelling risk interaction between foreign exchange rates and equity indices of the Johannesburg Stock Exchange (JSE) and to model the dependence structure of the underlying assets with some selected listed stock indices. We filtered the return residuals using the stochastic volatility and GJR-GARCH (1,1) models with different distributions, and we selected the best-fitted model in the GARCH framework. We applied the peaks-over-threshold (POT) method to the filtered residuals to fit it by the generalised Pareto distribution (GPD), and we used the vine copula to model the co-movement between foreign exchange rates and equity indices and value at risk (VaR) for risk quantification. We used three exchange rates (USD, GDP, and EUR) against the South African rand (ZAR) and six industry indices (banking, life insurance, non-life insurance, leisure, telecommunications, and mining). Our empirical findings show that the GJR-GARCH with Student’s t-distribution, combined with a regular (R)-vine copula, outperforms the alternatives models. Dependence structure analysis reveals a strong co-dependency between the stock from the financial industry and foreign exchange rates. The results also show that VaR-based R-vine copula outperforms the model compared to VaR-based D-vine and C-vine before the COVID-19 outbreak, while the D-vine copula produced appears to be the most suitable risk model specification for quantifying risk during the COVID-19 pandemic. Therefore, VaR-based R-vine copula is suitable for risk quantification, while GJR-GARCH with Student’s t-distribution produces better results in the GARCH framework. Further, we find that equity indices and foreign exchange rates exhibit higher tail risk contagion during the COVID-19 pandemic, with the non-life-insurance and telecommunications sectors appearing to be the investor’s safe haven among the listed sectors of the JSE. Our results will help South African investors seek risk-adjusted returns to substantially reduce the hedging cost of potential loss due to the misspecification of a risk model and make an investment decision during the global health crisis. Full article

This paper develops a formula to numerically estimate the unsubsidized, fair-market value of the toxic assets purchased with Federal Reserve loans. It finds that subsidy rates on these loans were on average 33.9 percent at origination. In contrast, by the 3rd quarter of the 2010, there was on average no subsidy in TALF loans. The theoretical model is used to predict the early redemption of Term Asset-Backed Securities Loan Facility (TALF) loans used to purchase commercial mortgage-backed securities (CMBS). The predictions of the model are strongly supported by the data. In addition, this paper looks at the determinants of early redemption. CMBS originated inside the peak bubble years of 2005–2007 were much less likely to be redeemed early. The giant investment managers, Blackrock and PIMCO, were much more likely to redeem their TALF loans early than smaller investment managers. Full article

Financial inclusion is a widely used measure to improve the living standards of households and foster inclusive economic growth. Thus, financial inclusion is one of the main policy objectives in developing countries. Besides, financial regulation (capital adequacy requirement) is a policy measure used to ensure financial stability. The objective of this study is to examine the effect of financial regulation on competitiveness and financial inclusion in 15 countries in the SADC (Southern Africa Development Community) region and 8 countries in the SAARC (South Asian Association for Regional Cooperation) region over the period 2005–2018. The result of Feasible Generalized Least Squares (FGLS) estimation suggests that financial regulation reduces competitiveness and hampers financial inclusion in the banking sector in the two regions. Furthermore, we find that financial stability moderates the negative effect of financial regulation on competitiveness and financial inclusion, meaning that financially stable banks remain competitive and normally offer financial products and services even if strong capital adequacy requirements are implemented. Additionally, we find that competitiveness increases financial inclusion in countries in the SADC region. The policy implication of this study focuses on regulatory flexibility to preserve the need for greater financial inclusion in the two regions. As for the practical implication, the study calls for strategic measures to preserve stability such as complementing financial inclusion with financial literacy, fostering corporate governance. Full article

The encouragement of potential investors who are emotionally broken by past losses and market experiences is crucial to the sustainable flow of funds to the stock market. This can be established by building a knowledge-creating mechanism among investors in their cognitive dimensions, which, in turn, can develop their risk-bearing potential to reach the optimum level so that emotionally broken investors can use their cognitive abilities with their developed risk-absorption potential to further invest in the market in the near future. This study investigates the mediating effect of risk-absorption attitudes in the relationship between cognition and neuroplasticity in investors. Data for the study collected from 506 individual retail investors’ samples using a stratified random sampling technique were analyzed through covariance-based structural equation modeling. The findings of the study indicate that the constructs, viz., the investors’ cognition, risk absorption, and neuroplasticity, are valid and reliable. The structural model also supports the notion that risk absorption mediates the relationship between the investors’ cognition and neuroplasticity. The outcomes of the study are expected to aid in the policy formulation for equity-related financial product marketers, such as depository participants, brokers, mutual funds and SIP institutions, and to help in healing psychological trauma that potential investors suffered from due to losses in the past and overcoming reluctances to further invest in stock markets. The investors’ terrible psychological health developed because of past loss experience can be restored through the concept of neuroplasticity, in which different cognitive dimensions are used, while also enhancing risk absorption in potential investors. Full article

In this paper, we compared the models for selecting the optimal portfolio based on different risk measures to identify the periods in which some of the risk measures dominated over others. For decades, the best known return-risk model has been Markowitz’s mean-variance model. Based on the criticism of the classical Markowitz model, a whole series of risk measures and models for selecting the optimal portfolio have been developed, which are divided into two groups: symmetrical and downside risk measures. Based on the tools provided by game theory, we presented a minimax model for selecting the optimal portfolio based on the maximum loss as a measure of risk. Recent research has shown the adequacy of the application of this risk measure and its dominance concerning variance in certain circumstances. Theoretically, the model based on maximum loss as a measure of risk relies on a much smaller number of assumptions that must be satisfied. In the empirical part of the paper, we analyzed the real return performance, structure, correlation, stability, and predictive efficiency of the model based on maximum loss return as a measure of risk and compared it with the other famous models to determine whether the maximum loss-based risk measure model is more suitable for use in certain circumstances than conventional return-risk models. We compared portfolios created based on different models over the period of 2000–2020 from a selected sample of stocks that are components of the STOXX Europe 600 index, which covers 90% of the free market capitalization in the European capital market. The observed period included 3 bear market periods, including the period of market decline during the COVID-19 crisis. Our analysis showed that there was no significant difference in portfolio returns depending on the selected model using the “buy-and-hold” strategy, but there were crisis periods. The results showed a significantly higher stability of portfolios selected on the criterion of minimizing the maximum loss than others. In periods of market decline, this portfolio achieved the best performance and had a shorter recovery period than others. This allowed superior use of the minimax model at least for investors with a pronounced risk aversion. Full article

In this study, we investigate whether effective corporate governance (CG) intervenes in the relationship between real earnings management (REM) and firm value (FV) by introducing Korean market data. We find that management’s opportunistic REM behavior is no longer effective for firms characterized by strong CG. More importantly, our interaction and robustness analyses show evidence indicating that CG plays an effective monitoring role in preventing management from engaging in opportunistic REM activities, and FV ceases to experience the decrease associated with REM activities as a consequence. Full article