Abu Dhabi Stock Exchange Research Articles

Risk and performance disclosure during the Covid-19 pandemic: does ownership structure matter?

Purpose This paper aims to investigate whether risk-related information is associated with a higher level of performance disclosure (PerfD) in the annual reports during the Covid-19 pandemic. Additionally, this paper assesses if ownership structure plays a moderating effect on the relationship between RD and PerfD. Design/methodology/approach A content analysis technique to measure the risk information and PerfD for 72 listed firms in the Abu Dhabi stock exchange and Dubai financial market for the period 2019–2021. Findings The authors find a significant correlation between risk disclosure and PerfD. Indeed, managers use annual reports to send a signal to the market about their abilities and skills in managing high-risk situations by disclosing more performance-related information accompanying any communicated related risk information. Besides, our results report that before the pandemic, only government ownership had a significant effect on the level of disclosure of performance-related information. However, during the pandemic, foreign ownership also played an important role to improve firm transparency. In addition, during the pandemic, Big 4 audit firms have effective quality control, and auditors would play an important role in improving the quality of disclosure. Besides, leveraged firms report more performance-related information. A high level of PerfD may play a critical role in mitigating debtholders’ concerns about firm’ ability to manage the pandemic situation and generate enough cash flows in the future to pay their debts. Originality/value This paper’s findings are highly relevant to financial reporting’ users, mainly shareholders, as they will be aware about management behaviors during the crisis and how firms are engaged in disclosure. Besides, this paper’s findings may be useful for market regulators to reinforce the role of audit quality to maintain good reporting, especially in crisis circumstances. In addition, regulators may benefit from the findings through the optimization of the ownership structure (dispersed ownership), which helps to promote transparency and disclosure.

Does stock liquidity determine dividend policy? New evidence from an emerging market

This paper aims to test the relationship between stock liquidity and dividend policy using a sample of UAE-listed firms during the period from 2013 to 2019. A panel regression model was applied on data from 42 firms listed on Dubai’s financial market and the Abu Dhabi stock exchange. The findings, which show that dividend policy is positively related to stock liquidity, are robust across different stock liquidity measures. Furthermore, we found that the impact of stock liquidity on dividend policy is stronger in small firms where the level of information is low. This paper provides evidence that stock liquidity has a positive impact on dividend policy, which supports the argument that stock liquidity provides information to the market and therefore encourages insiders to pay out dividends. The findings of this study can help researchers, analysts and investors to better understand the implications of stock liquidity on corporate policies. The study also contributes to our understanding of whether managers use dividend policy as a corporate tool to deal with information asymmetry.

The Sectoral Effects of Value-Added Tax: Evidence from UAE Stock Markets

This paper investigates the impact of 19 announcements pertaining to the introduction of value-added tax (VAT) in the United Arab Emirates (UAE) on equities listed on the Abu Dhabi Stock Exchange (ADX). Using a well-established event study methodology over the period 2015 to 2018, a sector-wise assessment of the value constructiveness or destructiveness of these announcements is conducted. In addition, an estimation of sector-wise changes in systematic risk following these announcements is provided. Significant sectoral differences in abnormal returns are observed with industries such as insurance and retail showing higher sensitivity. Certain announcements are identified as exerting more impact than others. The results document the outcome of the implementation of VAT and provide guidance to other countries in the Gulf region that plan to introduce VAT.

Environmental, Social, and Governance Disclosure, Ownership Structure and Cost of Capital: Evidence from the UAE

The capital structure decision is one of the most vital financial decisions of the corporation that consists of determining the optimal combination of equity and debt for the companies that would reduce the cost of capital. The examination of the capital structure has always gained importance especially in the theoretical and empirical studies while there is no study of the relationship between the environmental, social, and governance (ESG), the ownership structure, and the cost of capital. In this context, this paper aims to examine the potential impacts of the ESG disclosure and ownership structure on the cost of capital by using a sample of 30 companies listed on the UAE financial markets (Abu Dhabi Stock Exchange and Dubai Financial Market) during the period 2010–2019. The data show that there is an increasing trend in the different non-financial corporate disclosures. The empirical results of various models show that the ESG disclosure, the insider and the institutional ownerships have negative and significant impacts on the cost of capital. Furthermore, the environmental and the governance disclosures reduce the cost of capital. This paper demonstrates the strong role played by the ESG disclosure and the ownership structure in reducing the cost of capital for the companies. These results would encourage the companies in implementing the best practices of the non-financial disclosures and regulating their corporate governance mechanisms.

Investment opportunities, corporate governance quality, and firm performance in the UAE

PurposeThis paper examines the influence of investment opportunities on firm performance and evaluates corporate governance practices in the United Arab Emirates (UAE) to determine whether corporate governance quality moderates that influence.Design/methodology/approachA fixed-effects regression was employed to examine the influence of investment opportunities on firm performance and the role of corporate governance quality as a moderator for all listed firms on the Abu Dhabi Stock Exchange (ADX) and the Dubai Financial Market (DFM). We examined 501 firm-year observations for the period when the corporate governance code in the UAE was coming into force, from 2008 to 2012.FindingsThe regression results indicate that investment opportunities have a negative influence on firm performance. The corporate governance index used here shows that the level of corporate governance practiced in the UAE is weak. We also find that strong corporate governance ameliorates the negative influence of investment opportunities, which supports our hypotheses. The sub-indices of corporate governance that matter the most for moderating investment opportunities are board functioning and ethics.Practical implicationsThe results of this paper reflect the need to examine corporate governance in the context of the external environment represented by investment opportunities in our study. The findings could raise awareness of the importance of strong corporate governance practices, not only to directly improve firm performance but also through its influence on external variables. Legislators, regulators and other interested parties could use these results to examine practices in the UAE following the implementation of the corporate governance code.Originality/valueThis study contributes to the literature by evaluating the role that corporate governance quality and its components could play in firm performance and indirectly moderating other external factors (such as investment opportunities).

A closing call’s impact on market quality: evidence from Abu Dhabi stock exchange

Purpose This paper aims to look at the effects of the closing call auction on market quality and behavior by using the natural experiment of its introduction at the Abu Dhabi Stock Exchange. Design/methodology/approach Current paper studies the effect of closing call auction on various market quality factors such as liquidity, bid-ask spreads, volatility and market efficiency. Liquidity is proxied by trading volume. Bid-ask spreads provide a measure for the cost of trading in the market. Volatility is measured by using Parkinson’s (1980) volatility as in Huang and Tsai (2008). Last but not least, efficiency will be obtained by estimating a relative return dispersion measure as in Huang and Tsai (2008). Findings The introduction of the closing call auction leads to a significant decrease in the trading volume toward the end of the continuous trading. At the same time, trading activity taking place during the call auction significantly increases. This implies a redistribution of liquidity. The implementation of the closing call auction also improves market quality by reducing market inefficiency in terms of firm-specific noise. The study also documents that there exists no significant change in the cost of trading and intraday volatility in the post-period following the adoption of closing call auction. Originality/value This current study is the first one looking at this topic for the Abu Dhabi Stock Exchange. Specifically, this paper looks at the changes in trading volume, bid-ask spreads, intraday return volatility and market efficiency after the implementation of the closing call mechanism.

Financial integration in the United Arab Emirates Stock Markets

This paper examines the integration of financial markets using data from the Dubai Financial Market Stock Exchange, Abu Dhabi Stock Exchange and the FTSE Nasdaq Dubai UAE 20 index. To do this, we apply a vector error correction model and a permanent-transitory decomposition of the series of prices. Our results reveal the existence of a long-run equilibrium relationship between the three financial indices suggesting that UAE stock markets are integrated. Shocks to any of these markets affect the other markets in the long and the short run through the equilibrium condition. We uncover a major role of the FTSE Nasdaq Dubai UAE 20 index in this equilibrium relationship. Our analysis of market integration also allows us to obtain a permanent-transitory decomposition given by two common factors that drive the three financial indices. Whereas the first factor is defined as a weighted combination of the two major financial indices the second factor is mainly determined by the FTSE Nasdaq Dubai. As a byproduct of our analysis, we find empirical evidence of short-run and long-run predictability running from the Dubai financial indices to the Abu Dhabi index.

Predicting Stock Return of UAE Listed Companies Using Financial Ratios

Over the past few decades, numerous research across the globe has been conducted to examine the impact of firm performance on its stock return. The findings of these studies have been varied. In spite of the long standing research in this area, several attempt towards exploring this relationship has led to limited success owing largely to the existence of volatility across different stock markets. The variance in the volatility in these markets make it extremely difficult to obtain a uniform measure. A volatile stock market makes it difficult for the accounting and financial variables to accurately predict the stock returns (Feris & Erin, 2018). The primary aim of this paper is aimed to investigate whether financial ratios can be used as a predictor of stock returns in the context of United Arab Emirates (UAE). The sample of the study includes thirty companies from the Dubai Financial Market (DFM) and Abu Dhabi stock exchange (ADX). Data is collected for the period of 2017. This research comprises of five independent variables namely, Earning Per Share ratio (EPS), Price Earning ratio (PE), Return on Equity ratio (ROE), Dividend Yield ratio (DY) and Debt Equity ratio (DE) and stock return is taken as the dependent variable. The study examines which among the given ratios can better predict stock returns both in the short run and the long run. The analysis is based on the regression analysis and correlation matrix. The results of correlation test revealed less multicollinearity between the variables and the regression results showed that Dividend Yield and the Return on Equity are statistically significant to predict the stock returns. However, Earning Per Share, Price Earning and Debt Equity could not predict the stock returns and thus can be safely considered as statistically insignificant. The t-stats test and p-value analysis were key indicators for arriving at the conclusion. The study can significantly benefit investors who can examine closely the dividend yield and return on equity while selecting an optimal portfolio.

The dynamic behavior of evolving efficiency: Evidence from the UAE stock markets

The study examines the dynamic behavior of evolving efficiency in the United Arab Emirates (UAE) stock markets (i.e. the Dubai Financial Market (DFM) and the Abu Dhabi Stock Exchange (ADSE)) within four subsamples representing four key timeframes: prior to the 2008 global financial crisis (GFC), during the GFC, the Arab uprising crisis (AUC) and the 2014 oil prices crisis (OPC). On the empirical level, the modified logperiodogram (MLP) fractional differencing semi-parametric method is used to measure evolving efficiency. We find that the DFM and ADSE exhibit evidence of evolving efficiency. Both markets are found to be generally inefficient with a trend of improvement towards the weak-form of efficiency. This suggests that stock prices are predictable and possible arbitrage opportunities are present. The study also finds that the evolving efficiency process is: i) time-variant; and ii) exhibits evidence of conditional volatility and volatility persistence. However, we find no evidence of a leverage effect and asymmetric long memory volatility. These findings hold in the full sample and across all subsamples. Finally, we find that the long memory volatility model, in particular FIAPARCH, outperform the GARCH models in long-term, out-of-sample forecasting performance. The study also suggests that shocks resulting from crises do not provide stronger evidence for the dynamic behaviors of evolving efficiency. Our findings are among the foremost criteria for making investment decisions, and can reliably serve the needs of investors in their capital budgeting in order to ideally allocate their investment funds.

An investigation of stock market volatility: evidence from Dubai financial market

PurposeThe purpose of this paper is to assess the sources of Dubai Financial Market Index volatility shocks if they are from its own or previous shocks on the one hand, or if they are out board shocks (FSTE and S&P500) on the other.Design/methodology/approachA daily time series data were collected over the period 1st January 2014-31st December 2015 and the generalized autoregressive conditional heteroskedasticity (GARCH) methodology was implemented.FindingsEmpirically, the authors find that the current volatility of Dubai Financial Market Index is largely dependent on its own shocks and part of the external shock; in particular, S&P500. However, other external volatility (FSTE) cannot contribute to this volatility. Furthermore, our findings indicate that Abu Dhabi stock Exchange (APX) affects Dubai Financial Market Index.Practical implicationsThese results conclude that Securities Regulation Department in the federal state of United Arab Emirates had captured the effect of outside shocks from the UK only, but not from USA; this is basically due to the strong ties between the two countries. Accordingly, UAE investors seek capital outside their home country within a climate of increasing overseas’ investment options in the UK. More transparency of transactions via information technology will increase the efficiency of Dubai Financial Market.Originality/valueTo the best of the knowledge, this is the first work that shows the external and internal sources of volatility shocks at once; previous studies have focused almost exclusively on one type of shocks. To investigate DFM volatility shocks, the authors employed GARCH methodology; this method is an advanced econometric method and is often a preferred method to depict actual effects because it provides a more real-world context than other forms when trying to predict volatility shocks of financial instruments.

Corporate risk disclosure of Islamic and сonventional banks

This study examines the degree of the corporate risk disclosure and its impact on the banking performance using annual data of banks listed on the UAE financial markets: Abu Dhabi Stock Exchange (ADX) and Dubai Financial Market (DFM) during the period 2003–2013. The authors conduct the content analysis of the annual reports to measure the degree of the corporate risk disclosure. In addition, they use the panel data regressions to analyze the impact of the corporate risk disclosure on the performance of the banks. The results show low degree of the overall corporate risk disclosure index, strategic risk disclosure index, operational risk disclosure index, damage risk disclosure index, and risk management disclosure index for UAE listed banks. In addition, the results reveal significant differences in the overall corporate risk disclosure, strategic risk disclosure, financial risk disclosure, and risk management disclosure between conventional and Islamic banks. However, the effect of the degree of the overall corporate risk disclosure on the performance of UAE bank has been found insignificant. The findings of this paper contribute by providing a better understanding of risk disclosure practices in UAE and help the banks to optimally disclose their risk, improve the quality of their disclosure practices and enhance the quality of their financial reports. The impact of the corporate risk disclosure on the performance of the banks has not been examined by any of the prior researches. In addition, this paper examines the potential difference between Islamic and conventional banks in their corporate risk disclosure practices.

Does audit committee substitute or complement other corporate governance mechanisms

PurposeThe purpose of this paper is to examine the relation between audit committee (AC) and a set of other corporate governance mechanisms in one of the emerging economies, United Arab of Emirates (UAE). In particular, the current study examines whether an effective AC can serve as a substitute or as a complement mechanism to board characteristics and ownership structure of Emirati listed non-financial companies.Design/methodology/approachUsing substitution and complementary theories, a panel data from 48 nonfinancial companies listed on the UAE Stock Exchanges [Abu Dhabi Stock Exchange and Dubai Financial Market] during the period between 2011 and 2013 were used in the current study. A composite measure of four proxies has been used to measure the AC effectiveness, namely, AC size, independence, financial expertise and diligence. To test the hypotheses formulated for the study, a logistic regression model was used to identify the influence of a set of board characteristics and ownership structure variables on the effectiveness of the AC after controlling for firm size, auditor type, industry type and profitability.FindingsWhile AC effectiveness appeared to be positively associated with board size and board independence, it is negatively associated with CEO duality. This points to a complementary governance relation. On the other hand, the negative relationship between AC effectiveness and each of institutional and government ownership suggests substitutive relations.Research limitations/implicationsThe main shortcoming of the current study is that it examines the influence of a certain set of corporate governance factors on the effectiveness of AC. Other corporate governance mechanisms may, however, contribute to the effectiveness of AC. The findings of the study can be used by companies’ managements and regulators in the UAE to improve the corporate governance system.Originality/valueTo the best of researchers’ knowledge, this study provides the first evidence about the interaction among multiple governance mechanisms required by the code of corporate governance issued by the UAE Ministry of Economy in 2009. The current paper is expected to add to the limited AC literature in Middle East and North African countries in general and Arab World in particular.

Corporate Risk Disclosure of Islamic and Conventional Banks

This study examines the degree of the corporate risk disclosure and its impact on the banking performance using annual data of banks listed on the UAE financial markets: Abu Dhabi Stock Exchange (ADX) and Dubai Financial Market (DFM) during the period 2003-2013. The authors conduct the content analysis of the annual reports to measure the degree of the corporate risk disclosure. In addition, they use the panel data regressions to analyze the impact of the corporate risk disclosure on the performance of the banks. The results show low degree of the overall corporate risk disclosure index, strategic risk disclosure index, operational risk disclosure index, damage risk disclosure index, and risk management disclosure index for UAE listed banks. In addition, the results reveal significant differences in the overall corporate risk disclosure, strategic risk disclosure, financial risk disclosure, and risk management disclosure between conventional and Islamic banks. However, the effect of the degree of the overall corporate risk disclosure on the performance of UAE bank has been found insignificant. The findings of this paper contribute by providing a better understanding of risk disclosure practices in UAE and help the banks to optimally disclose their risk, improve the quality of their disclosure practices and to enhance the quality of their financial reports. The impact of the corporate risk disclosure on the performance of the banks has not been examined by any of the prior researches. In addition, this paper examines the potential difference between Islamic and conventional banks in their corporate risk disclosure practices.

Does Operational Risk Disclosure Quality Increase Operating Cash Flow of UAE Islamic and Conventional Banks?

This study aims to measure the degree of operational risk disclosure and examine its impact on operating cash flow of banks listed on the UAE financial markets: Abu Dhabi Stock Exchange (ADX) and Dubai Financial Market (DFM) during the period 2009-2013. The authors conduct the content analysis of the annual reports to measure the degree of the operational risk disclosure. In addition, they use the panel data regressions to analyze the impact of the operational risk disclosure on the operating cash flow generated by the banks. The results show low degree of the operational risk disclosure of all, Islamic and conventional UAE banks. In addition, the results show that the higher the disclosure of operational risk the higher the cash flow of conventional banks. The operational risk disclosure of the Islamic banks has not been examined by any of the prior researches. In addition, this paper examines the potential impact of the operational risk disclosure on the operating cash flow generated by the banks.

Does Risk Disclosure Reporting Quality Reduce Credit Risk?

This study aims to measure the degree of corporate risk disclosure and examines its impact on credit risk of banks listed on the UAE financial markets: Abu Dhabi Stock Exchange (ADX) and Dubai Financial Market (DFM) during the period 2007-2013. The results of the content analysis show low degree of the overall risk disclosure index and all the sub-risk categories except the financial risk disclosure for all, Islamic and conventional UAE banks and the market risk disclosure for Islamic banks. The effect of the degree of the risk disclosure on credit risk is examined by applying the robust Generalized Method of Moment System Estimation (GMM) to dynamic panel data. The results of the GMM show that the higher the disclosure of strategic risk, operational risk, and damage risk, the higher the credit risk for all UAE listed banks. In terms of comparison, the results also show significant differences in credit risk, strategic risk disclosure, firm’s damage risk disclosure, and risk management disclosure between conventional and Islamic banks.

Determinants affecting the decision to outsource the internal audit function in Abu Dhabi Stock Exchange

This paper explores internal audit function (IAF) outsourcing practices in Abu Dhabi Stock Exchange (ADX). It examines the effect of the determinants, such as independence of the external provider, cost saving, technical competence, corporate governance strategy, and company size, on the decision to outsource the IAF in UAE. A questionnaire has been developed piloted to the Chief Audit Executive, in 65 listed companies in ADX. The results show a significant positive relationship between independent variables and the decision to outsource the IAF. However, results find no significant relationship between the independence of the external provider and the decision to outsource the IAF, and a significant positive relationship between (technical competence, cost savings) and the decision to outsource the IAF. Moreover, the analysis shows a significant negative relationship between the company size and the decision to outsource the IAF.

Determinants affecting the decision to outsource the internal audit function in Abu Dhabi Stock Exchange

This paper explores internal audit function (IAF) outsourcing practices in Abu Dhabi Stock Exchange (ADX). It examines the effect of the determinants, such as independence of the external provider, cost saving, technical competence, corporate governance strategy, and company size, on the decision to outsource the IAF in UAE. A questionnaire has been developed piloted to the Chief Audit Executive, in 65 listed companies in ADX. The results show a significant positive relationship between independent variables and the decision to outsource the IAF. However, results find no significant relationship between the independence of the external provider and the decision to outsource the IAF, and a significant positive relationship between (technical competence, cost savings) and the decision to outsource the IAF. Moreover, the analysis shows a significant negative relationship between the company size and the decision to outsource the IAF.

Does Operational Risk Disclosure Quality Increase Operating Cash Flows?

Abstract This study aims to measure the degree of operational risk disclosure and examine its impact on operating cash flow of banks listed on the UAE Abu Dhabi Stock Exchange (ADX) and Dubai Financial Market (DFM) during the period 2003-2016. The authors conducted content analysis of the annual reports to measure the degree of operational risk disclosure. In addition, they used dynamic panel data regressions to analyze the impact of operational risk disclosure on the operating cash flow generated by the banks. The results show a low degree of operational risk disclosure for all UAE banks, both Islamic and conventional. In addition, the results show no association between the levels of disclosure of operational risk and cash flow for all banks, conventional and Islamic. Operational risk disclosure of Islamic banks has not been examined by any prior researchers. In addition, this paper examines the potential impact of operational risk disclosure on the operating cash flow generated by the banks.

Wealth Creators in the Banking Sector in UAE during 2010-2015 Period

<p>The returns of 20 actively traded banking stocks in UAE were analysed during the five and half year period 2010 to mid-2015.The performance of the stocks of banking firms was analysed in terms of yearly average returns, cumulative total returns and holding period returns. The stock prices were obtained from Abu Dhabi Stock Exchange and Dubai Financial Market websites.</p>

Stock exchange industry in UAE

Purpose – The purpose of this paper is to give an overview of UAE Stock Exchange industry. In particular this paper aims to assess a potential merger between Dubai Financial Markets-Nasdaq-Dubai and Abu Dhabi Securities Exchange, evaluating risks, rewards, policy and business implications. Design/methodology/approach – The paper presents a theoretical framework and a literature review of M & As in financial sector. It then carries out a case study on a potential merger between the UAE Stock Exchanges and a discussion on the implications for the actors involved. Findings – The contraction both in market capitalization and in trading value in the three UAE Stock Exchanges caused by subprime financial crisis and market fragmentation could be a key factors in implementing a merger between them. Because of high-fixed costs and trading platform, a single consolidated stock exchange may benefit from significant economies of scale, particularly network effects, and economies of scope. Practical implications – This paper could be useful to Security and Commodity Authority, in order to support a merger between Dubai and Abu Dhabi Stock Exchange. Given that UAE capital market regulator has tried to improve efficiency in UAE stock market over the last years, a merger between UAE Stock Exchanges could have positive effects on overall efficiency. Originality/value – It is the first paper that analyze UAE Stock Exchange industry. It is the first study that focusses on a potential merger between emerging markets’ stock exchanges. It is one of the first contributions that relates stock exchanges belonging to emerging and developed countries.