Average Equity Research Articles

DETERMINANTS OF BANK PROFITABILITY: EMPIRICAL EVIDENCE FROM A PACIFIC SMALL ISLAND DEVELOPING STATE

Purpose: This study aims to investigate the determinants of profitability of the Fijian banks for the 2001-2019 periods. Using several bank-specific and external variables, and covering nineteen years, researchers measure the impact of each variable on Return on Average Assets, Return on Average Equity, and Net Interest Margin.
 Methodology: The sample of this study comprises five commercial banks and two credit financiers. Purposive sampling is employed resulting in 133 audited financial statements. Stata version 16 is used for multivariate econometric analysis and hypothesis testing.
 Main Findings: The results of this research show that bank size, risk, and exchange rate positively impacts bank profitability while management efficiency, broad money supply, and quality of regulation negatively affect profitability. On the other hand, the level of liquidity, economic growth, and inflation do not have any impact on profitability.
 Application of this study: The findings of this study can be of significance for regulators as well as financial institutions in policy development and market oversight to ensure the sustainability of financial institutions.
 Novelty/Originality of this study: Few studies have so far been carried out on the banking sector in Fiji with only one focusing on profitability determinants. This study, using accounting financial ratios and several macroeconomic variables is unique in the sense that it uses several external variables not considered previously.

PENENTUAN RASIO-RASIO KEUANGAN YANG BERPENGARUH TERHADAP KESEHATAN KEUANGAN PERUSAHAAN ASURANSI UMUM DI INDONESIA

The results indicated that there was a significant difference between well financial performances of general insurance firms and inappropriate financial performances of general insurance firms. These can be seen at F test, Sig and Wilk’s Lambda. This research also could produced Z Score Model, in which could differentiate the well financial performances and inappropriate financial performances with the level of accuracy of 88%. This research discovered that the ratio that could affect the well financial performances for general insurance firms in Indonesia, are ratios between Net retention premium and equity and ratio between profit (loss) after tax to average equity. This research also shown that the government policy on Finance Minister Decision No.424/KMK 06/2003 and the plan provided on Indonesian Insurance Architect, would be able to improve financial performances of general insurance firms.

Is there a nonlinear relationship between nonperforming loans and bank profitability? Evidence from dynamic panel threshold

This study examines the threshold effect in the nonperforming loans–profitability nexus within the Nigerian banking industry. Using the innovative dynamic panel threshold of Seo, Kim, and Kim (2019), the work documents threshold levels of 3.5% and 5.0% of nonperforming loans for return on average assets (ROAA) and return on average equity (ROAE), respectively. These levels of nonperforming loans ensure equilibrium profitability without stability trade‐off in the industry. Similarly, the robust models suggest the threshold of 5.2% and 2.81% of impaired loans for optimal ROAA and ROAE, respectively. The results are important for policy formulations. It is recommended that the Central Bank of Nigeria (CBN) should review the 5% threshold nonperforming loans adopted in the industry in 2019 prudential guidelines to ensure stability in the Nigerian banking industry.

Explaining Stagnant Living Standards in a Generalized Asset Growth Context

: Aggregate U.S. assets have grown at an impressive rate over the past four decades, especially in recent years. Despite this, middle class living standards have remained relatively flat over the past four decades, and substantial debt has been required to maintain consumption at customary levels. We assemble the U.S. balance sheet for the past seventy years, showing how mounting debt has contributed to growth in financial assets, relative declines in net worth, and increases in assets in relation to GDP. We also calculate a financialization ratio based on our data, for which the trend line identifies a structural break circa 1980 after which the U.S. economy “financializes.” Our numbers, moreover, support the claim that the debt spiral intensified income inequality. Most remarkably, average national equity returns remained flat or even declined slightly post-1980 despite much greater volatility and debt leverage, contrary to what basic financial theory would dictate.

Impact of Environmental Accounting Reporting Practices on Financial Performance

The study intended to explore the effect of environmental accounting reporting (EAR) practices on the financial performance of the banking industry of Bangladesh. Panel data consisting of 25 listed banks in Dhaka Stock Exchange (DSE) over the period 2012 to 2016 has been employed in this study. An environmental accounting reporting score (EARS) index has been developed by analyzing the content of banks' annual reports. Using Pooled OLS, the analysis revealed that EAR reporting had been increased after publishing the Bangladesh bank guideline. The empirical analysis showed that a significant positive correlation between EAR and profit margin (PM). However, EAR has an insignificant relationship with ROAE (return on average equity), EPS (earnings per share), and ROAA (return on average assets). Among control variables, size, capital ratio, overhead expense, and loan ratio have a significant impact on financial performance.

The influence of family board involvement on working capital management

While research on long-term capital structures of family and non-family firms is well established, differences in current assets- and liabilities-management are largely under-researched. The aim of the study is to examine whether the type and degree of family involvement in the firm affect the efficiency of working capital management. Employing a partially hand-collected panel of 278 listed firms from 2000–2013 this paper analyzes the impact of family shareholders as owners, managers, and supervisors on working capital handling in Germany. The results show that primarily the share of family members in the executive board increases the length of the cash conversion cycle (CCC), particularly in smaller and non-service firms. Most notably, family management increases the inventory period (DIO). The higher average equity ratio of family firms suggests that family firms may face reduced financing pressure to address such inefficiencies in current assets and current liabilities management. Furthermore, family-managed firms may be less professional in their working capital management. The findings contribute to the literature by showing that in a country with a less investor-friendly corporate governance system, family influences on working capital management are primarily due to management presence, not plain shareholder influence. The results stress the need for researchers to consider the degree of family management involvement when analyzing the financial aspects of family firms.

Responsible Investing and Stock Allocation

We analyze the portfolio choices of approximately 913,000 active participants in employee saving plans in France. Looking at the cross-section of equity exposure, we find that the inclusion of responsible equity options in the menu of available funds is associated with a 2.1% higher equity allocation by plan participants. Compared to an average equity asset allocation of 12.1%, it represents a material increase (17% in relative terms). Difference-in-differences analyses confirm that the introduction of a responsible equity option to a saving plan is followed by an increase of 7.2% in participants' appetite for stocks, contrary to what happens with conventional equity funds.

Forecast combination puzzle in the HAR model

The Heterogeneous Autoregressive (HAR) model of Corsi (2009) has become the benchmark model for predicting realized volatility given its simplicity and consistent empirical performance. Many modifications and extensions to the original model have been proposed that often only provide incremental forecast improvements. In this paper, we take a step back and view the HAR model as a forecast combination that combines three predictors: previous day realization (or random walk forecast), previous week average, and previous month average. When apply- ing the Ordinary Least Squares (OLS) to combine the predictors, the HAR model uses optimal weights that are known to be problematic in the forecast combination literature. In fact, the simple average forecast often outperforms the optimal combination in many empirical applications. We investigate the performance of the simple average forecast for the realized volatility of the Dow Jones Industrial Average equity index. We find dramatic improvements in forecast accuracy across all horizons and different time periods. This is the first time the forecast combination puzzle is identified in this context.

Macro-Financial Trends in a Model with Concentrated Ownership of Capital

This paper investigates the macroeconomic and asset pricing consequences of the upward trend in financial market participation observed in the U.S. since the late 1980s. In a limited participation two-agent Real Business Cycle model where stockholders feature external habit preferences, higher participation produces an increase in the average equity premium and in stock market volatility, while reducing the risk-free rate and the standard deviation of aggregate consumption. When coupled with a lower volatility of aggregate shocks, this mechanism helps rationalizing a period characterized by milder aggregate fluctuations but increased perceived risk in asset markets, such as the Great Moderation. I show that these results stem from a novel mechanism whereby an increase in the participation rate improves risk-sharing but raises the representative investor's average risk-aversion, with the latter channel dominating the former. Using household-level data on consumption from the U.S. Consumer Expenditure Survey for the sample 1984-2017, I show that the risk-aversion channel is consistent with the empirical evidence.

Company fundamentals as determinants of firm-level equity premiums: Evidence from an emerging economy

Equity premium is a vital number to consider in finance when making fund allocations and investment decisions. This study explores the relationship between (controllable) determinants of firm-level equity premiums in the context of the Pakistan stock market. It uses a sample of 306 firms? annual data, from January 2001 to December 2015, using a two-stage least-squares method to estimate our panel data model (Jeffrey M. Wooldridge 2005; Manuel Arellano 2016). During the selected sample period, the average market premium of the Pakistan stock exchange (100 Index) was 20%. The average equity premium of individual firms was only 8%. Company fundamentals are considered determinants of firm-level equity premiums. Panel data econometrics techniques were used to estimate the modified version of the multi-factor model for the Pakistan Stock Exchange. It is found that the market premium, return on equity, dividend payout ratio, accounts receivable and firm size significantly and positively affect the firm-level equity premium. However, increase in the debt-to-equity and quick ratio negatively affect that premium. The company fundamental variables are controllable for the firms and can be improved by company management to encourage investors and maximize shareholder wealth.

Cross Border Investing Activity: Return Enhancing or Return Destroying?

Real Estate Investment Trusts (REITs) in the United States have grown extremely fast in terms of assets and market capitalization since the early 1990s. As with many industries, U.S. REITs began acquiring foreign properties as their size grew and they needed to seek new investment opportunities. This study investigates the role of holding foreign assets upon the total return of U.S.-based REITs from 1995 through 2016. We find that holding foreign properties is associated with negative relative performance when measured by return on average equity, an accounting-based measure. However, when excess return to shareholders is measured, increasing relative performance is found. Thus, it appears that investors are rewarding REITs with greater degrees of international holdings, while simultaneously accepting lower return on equity and potentially lower dividend and distribution yields.

Does Unconventional Monetary Policy Affect Bank Profitability in the Euro Area?

This paper investigates the impact of unconventional monetary policy (UMP) on bank profitability in the euro area, over the period 2007-2019.In particular, through multiple regression models, we analyze the relationship between the UMP variables (Longer-term refinancing operations and Securities held for monetary policy purposes) and the main bank profitability variables used in the literature (Return on average equity, Return on average assets and Net interest margin).This work is original compared to recent studies on the subject as it considers the impact of UMP expressed in terms of volumes rather than in terms of interest rates on bank profitability variables.Our results suggest that the UMP adopted by the Eurosystem over the period considered is negatively associated with bank profitability expressed by the Return on average equity and the Return on average asset. By contrast, monetary policy measures do not seem to have had any effect on the Net interest margin.

Do Growth Assets Drive Returns: A Critique of the APRA Heatmap Insights

APRA released their “Heatmap” in December 2019, and the accompanying material related growth assets to investment returns, with the implication that higher exposure to growth assets would result in higher investment returns than otherwise would occur. We have used a statistical and systems analysis to identify the dominant asset allocations related to funds with Quartile 1 and Quartile 4 investment returns and concluded that whilst above average exposure to infrastructure and property was a determinant of Quartile 1 performance, above average equity exposure is not. We also found that funds under management are a significant characteristic of determining investment performance and may well be the characteristic driving the allocations to the assets.

Does the gender quota law affect bank performances? Evidence from Italy

PurposeThis study aims to examine the impact of an increasing board diversity on the performance of Italian listed banks for the period 2008–2014, taking into account the effects of the implementation of gender quota laws in Italy. The study also investigates the effects of this potential relationship during the crisis that Italy had to cope with since 2011, as well as the potential impact of female directors and their roles on bank boards.Design/methodology/approachTo verify this relationship, the study uses a panel sample of 22 listed banks and applies fixed effects with the Driscoll-Kraay error. Considering the shareholders’ perspective, bank performance (BP) is measured by return on average equity. The robustness of results is verified through return on average assets, Tobin’s Q (a market measure from investors/stakeholders’ perspective) and an alternate estimation model, i.e. GMM.FindingsThe findings highlight a positive relationship between the performance accounting measures and gender diversity, a non-neutral impact of the presence of female directors on boards and a significant and negative effect on market measures.Research limitations/implicationsThe results of the study, as far as accounting measures are concerned, support managerial and legislative efforts toward more gender-balanced boards and the appointment of female directors in executive or independent roles. As per market measures, the results suggest that the presence of women on boards should be considered advantageous in terms of value, so that the market can finally appreciate diverse bank boards.Originality/valueFirst, previous studies did not provide exhaustive results to document the proposed relationship and did not examine this relationship during a financial crisis. Second, the role of female directors on boards is also taken into account. Third, the study highlighted that BP is a multi-dimensional construct, with accounting and market metrics being its distinct dimensions.

Media reputation: a source of banks' financial performance

PurposeBased on the resource-based view (RBV) and the signaling theory, this paper examines the effect of media reputation on financial performance as well as the moderating role of bank characteristics (risk management and financial capacities) in this relationship, using Vietnamese commercial bank data for the period 2007–2018.Design/methodology/approachWe rely on the agenda-setting theory to measure the media reputation of banks. Return on average equity (ROE) is used as a proxy of financial performance. We regress financial performance on media reputation with fixed effects to control unobserved variables. In addition, the instrumental variable (IV) method is applied to deal with the endogeneity problem. We use the change in bank logo as an IV for media reputation.FindingsWe find that media reputation has a positive effect on financial performance. This effect becomes prominent for large banks, listed banks or banks that demonstrate good risk management capacities, and is particularly strong when we control for endogeneity bias. The effect of media reputation on financial performance is transmitted through the non-performing loan (NPL) channel.Research limitations/implicationsThe research findings further endorse the positive impact of media reputation on financial performance in the low-quality institutional settings. Moreover, these findings expand the existing knowledge regarding the relationship between media reputation and financial performance by affirming two strategies which could be used to leverage the contribution of media reputation including improving banks' risk management capacities and raising financial capital.Originality/valueThis is the first known paper to examine the effect of media reputation on financial performance in commercial banks in an underdeveloped institutional setting while exploring the moderators in this relationship. This study, therefore, provides insightful implications for different bank segments in managing NPL and taking advantage of media reputation as a potential resource of financial performance.

Chinese entrepreneurship in Indonesia: A business demography approach

This article analyses the demography of 1,600 registered firms owned and/or operated by ethnic Chinese businessmen in Indonesia during 1890–1940 in search of generalisable indications of Schumpeterian entrepreneurship. The population of firms increased significantly from 1890, before many went out of business in the 1920s and a new generation of firms and entrepreneurs emerged. By 1910 most firms were active in trade, but this categorisation takes insufficient account of their diverse business activities. During 1910–1940 the share of firms in other industries increased. Several were active in finance, taking deposits and financing business ventures. In the 1930s, the average equity value of the enterprises more than doubled, reflecting diversification into more capital-intensive operations, particularly manufacturing. These changes in the population of firms refute the perception that ethnic Chinese businessmen were not Schumpeterian entrepreneurs. Supplemental data for this article is available online at https://doi.org/10.6084/m9.figshare.12254018.

An Empirical Analysis of Firm-Specific Factors and Equity Premium: Evidence from Manufacturing Sector of Pakistan

Equity premium is a vital number in finance to be considered for making fund allocation and investment decisions. This study explores the relationship between (controllable) determinants of firm-level equity premium in the context of Pakistan stock market. We use a sample of 306 firms’ annual data, from 01/2001 to 6/2017, using a two-stage least-squares method to estimate our model. During the selected sample period, the average market premium of the Pakistan stock exchange (KSE100 Index) was twenty percent. The average equity premium of individual firms was only eight percent. Company fundamentals are considered determinants of firm-level equity premiums. Panel data econometrics techniques were used to estimate the modified version of the multifactor model for the Pakistan Stock Exchange. It is found that the market premium, return on equity, dividend payout ratio, accounts receivable, and firm size significantly and positively affect the firm-level equity premium. However, increase in the debt-to-equity ratio and quick ratio negatively affects that premium. The company fundamental variables are controllable for the firms and can be improved by company management to encourage investors and maximize shareholder wealth.

Cross-Sectional Equity Correlations and the Value of Active Management

This article examines the cross-sectional correlations among equities and relates them to the performance of actively managed mutual funds. When the average correlation between equities’ returns is higher, there is less opportunity for active management to outperform. Consistent with this, we find that actively managed mutual funds generate lower abnormal returns when the average cross-sectional correlation is high. This result holds for both small and large funds, within various subperiods, and when controlling for fund fixed effects. Our results have implications for investor portfolio allocation during periods such as the 2020 COVID-19 panic. TOPICS:Factors, risk premia, factor-based models, mutual funds/passive investing/indexing, mutual fund performance Key Findings • The average correlation between the returns of each individual stock and the market varies over time and influences the opportunities for active management. • We find evidence of stronger average equity mutual fund performance when the average correlation across publicly traded equities is low. • The impact of return correlation on fund performance is greatest among funds with low total net assets, which are less impacted by liquidity effects.

Factors influencing investment decisions of individual investors at Nepal stock exchange

The behavior of individual investors is concerned with choices regarding purchasing small quantities of securities for their own account. Investment options are also supported by decision-making instruments. It Is assumed that information structure and the market related factors systematically affect the investment decisions of individuals as well as market outcomes. The main purpose of the analysis was to identify the factors affecting individual investors’ investment decisions on the Nepal Stock Exchange. The study was conducted on the 214 responses received from the individual investors based on the random sampling method Data for the research were collected using a structured questionnaire distributed to the respondents. The questionnaire constituted 35 items. The respondents were individual investors. In this study, data were analyzed using frequencies, mean scores, standard deviations, percentages, and factor analysis techniques. The study confirmed that there appears to be a certain degree of correlation between the factors defined for the average equity investor by behavioral finance theory and prior empirical evidence. The researcher explored that the most significant factors shaping individual investment decisions were: statement of the government officials, expected capital increase, firm’s status in industry, diversification purpose, the attractiveness of non-stock investment, ease of obtaining borrowed funds, opinions of the firm’s majority stockholders, family member opinions, recent price movement in a firm’s stock, fluctuations in the stock index, rumors, expected corporate eating, stock marketability, the results of technical analysis, the dividend paid, perceived ethics of firm, the reputation of the firm’s shareholders, and feeling for a firm’s product and services. The results of this research will provide an understanding of the different decisions to be taken by investors on the basis of the prevailing factors and the possible consequences of each decision. The analysis would also help to recognize the most significant factors in the behavior of the company’s investors as their potential policies and plans will be impacted as the investment decisions of investors will determine the strategy to be used by the company.

Correlations, Value Factor Returns, and Growth Options

This paper documents that the average equity market correlation is informative about the value of growth options and the correlation dynamics of growth and value stocks and, in turn, forecasts changes in growth options and the returns on the value factor. Consistently, a production-based asset-pricing model shows that correlations are homogeneous among stocks with similar growth characteristics and increasing in the value of growth options. Therefore, the expected average equity correlation serves as a leading procyclical state variable and drives the value premium. Correlations extracted from an equity value index improve the predictability of value-related factors in-sample and out-of-sample.