Balance Sheet Ratios Research Articles

A Study of the Impact of Private Equity Funds on the Value of SMEs

Private equity (PE), a type of equity investment in unlisted companies, has gradually become more popular in the domestic market as a result of China's economy's rapid development. According to certain experts, private equity significantly affects businesses. Less research has been done, though, on how private equity funds affect business value. The focus of this article is therefore the impact of PE on the valuation of SMEs. Based on the GEM data from 2019 to 2022, the empirical analysis of the results by means of multi-linear regression model indicates that the value of private equity firms is higher than that of non-private equity investors, and the lower the balance sheet ratio, the higher the return on net assets ratio, or the higher the research and development intensity of the enterprises participated by private equity institutions, the more conducive it is to increase the value of small and medium-sized enterprises.

Credit scoring: Does XGboost outperform logistic regression?A test on Italian SMEs

The old-fashioned logistic regression is still the most used method for credit scoring. Recent developments have evolved new instruments coming from the machine learning approach, including random forests.In this paper, we tested the efficiency of logistic regression and XGBoost methods for default forecasting on a sample of 35,535 cases from 7 different business sectors of Italian SMEs, on a set of 28 banking variables and 55 balance sheet ratios for verifying which approach is better supporting the lending decisions.With this aim, we developed an efficiency index for measuring each model's capability to correctly select good borrowers, balancing the different effects of refusing the loan to a good customer and lending to a defaulter. Also, we computed the balancing spread to quantify the different models' efficiency in terms of credit costs for the borrower firms.Results show that different sectors report different results. However, generally speaking, the two methods report similar capabilities, while the cutoff setting can make a substantial difference in the actual use of those models for lending decisions.

A study on financial performance of central bank of India

The banking industry plays a vital role in the economic development of a country which determines the money circulation among the people. The country's survival depends on the banking industry, which serves as the economy's foundation. Financial Performance is the only key tool which decides the operational efficiency along with sustainability of banking sector. The financial organization of branches and a different scope of monetary administrations, India's financial framework is enormous. The focus of this paper is to examine the financial performance of Central bank of India by using the analyzed ratios, for example, liquidity ratios, Solvency ratios, profit and loss ratios and balance sheet ratio are to be used for the assessment of financial performance of central bank of India with help of income and expenditures and consolidated balance sheet from the period of 2018 to 2022.

Transaction-based lending and real earnings management

Purpose The purpose of this study is to examine how lenders alter their behavior when faced with real earnings management.Design/methodology/approach This study uses the incremental R-square approach as in Kim and Kross (2005) to examine how much lenders rely on income statement and balance sheet ratios as the degree of real earnings management increases.Findings As real earnings management affects mostly the income statement, the authors find that lenders rely less on income statement ratios in making credit decisions in the presence of real earnings management. The authors also find that lenders do not alter their reliance on balance sheet ratios when faced with real earnings management.Originality/value This paper is the first to study how lenders alter their reliance on financial statements in making credit decisions in the presence of real earnings management. The findings of this paper could help the regulators set standards to improve the usefulness of financial statements. The findings of this paper could also help practitioners (borrowers and lenders) understand how real earnings management affects credit decisions.

Low price-to-book ratios and bank dividend payouts: economic policy implications

Abstract Banks with a low price-to-book ratio (PBR) have a greater propensity to pay out dividends. This propensity is especially marked for banks with a PBR below a threshold of 0.7, a situation that characterizes many banks in recent years, especially in the euro area. We demonstrate these features using data for 271 advanced economy banks in 29 jurisdictions. Dividend payouts as a proportion of profits rise in a non-linear way as the PBR falls below 0.7. In a hypothetical exercise with fixed balance sheet ratios, we find that a suspension of bank dividends in 2020 during the COVID-19 pandemic would have added, under different stress scenarios and parametrizations, an additional US$0.2–1.1 trillion of bank lending capacity in our sample, equivalent to 0.3–1.6% of total GDP.

In Italy, through a 'corporate' evolution, the tax authorities use balance sheet ratios to assess the possibility of tax debt accrual Remarkable development

In Italy, through a 'corporate' evolution, the tax authorities use balance sheet ratios to assess the possibility of tax debt accrual Remarkable development

Diagnosing default syndromes: early symptoms of entrepreneurial venture insolvency

PurposeIn this study, a panel of 74,128 Italian SMEs was analyzed to verify whether any syndromes could be identified and defined through financial ratios. Defining relevant syndromes (i.e. the set of correlated signs and symptoms often associated with a particular disorder) can be of importance for assessing which specific intervention can solve a firm's difficulties.Design/methodology/approachTo identify the main syndromes involved in company defaults, firstly, financial data on defaulted firms for each of the main economic sectors were examined through a cluster analysis; the results obtained for each sector were then compared to verify whether syndromes recur across sectors. Finally, the effects of each syndrome were compared with possible default causes, as described by previous literature.FindingsResults show that a significant share of corporate insolvencies is characterized by a set of recurrent signs and symptoms so that the main syndromes can be identified. The results also show that these syndromes recur across sectors, even if specific values characterize each sector.Research limitations/implicationsThe approach adopted in this study sets a new direction for the analysis of default risk, as the study shows that certain key syndromes can be defined and described, and the study suggests that different problems can induce different risk patterns. Further analyses of other samples could confirm whether the same syndromes recur over countries and over time.Originality/valueThis is the first study aimed at identifying and describing the syndromes affecting SMEs, conducted by means of balance-sheet ratios.

The determinants of banking regulation in the MENA region

Theoretical foundations in banks' response to capital settlement suggest that the systems proposed by Basel are not sound. It is conceivable that regulators will consider alternative approaches to enhance the safety and soundness of the banking system. The regulation includes several decrees and ratios; the areas of interest encompassing the areas are subject to principal component analysis (PCA).The paper aims to present a regulatory framework based on balance sheet ratios, such as Capital requirements (equity ratio; Tier 1 ratio; Total Equity/Net Loans; Total Equity/Deposits); for liquidity needs (liquidity/deposits; liquidity/total assets; liquidity/deposits and loans, and net loans/total assets); for leverage requirements (total liabilities/total assets; total assets/equity; and total liabilities/equity); also banking restriction index; Official supervision index; Private surveillance index, finally global index of regulations and supervision. Besides, it performs a PCA analysis on a set of 13 financial ratios to exploit and compare the financial characteristics of 239 banks (175 Conventional and 64 Islamic commercial banks) in the MENA region over a 2004-2015 period. This gives the main indices EXIGCP, EXIGLIQ, LEVCP, and LEVP.

Low Price-To-Book Ratios and Bank Dividend Payout Policies

Banks with a low price-to-book ratio have a greater propensity to pay out dividends. This propensity is especially marked for banks with a price-to-book ratio below a threshold of 0.7. As a sector, banks also tend to have higher dividend payout ratios than non-financial firms. We demonstrate these features using data for 271 advanced economy banks in 30 jurisdictions. Dividend payouts as a proportion of profits rise in a non-linear way as the price-to-book ratio falls below 0.7. In a hypothetical exercise with fixed balance sheet ratios, we find that a complete suspension of bank dividends in 2020 during the Covid-19 pandemic would have added, under different stress scenario, an additional US$ 0.8–1.1 trillion of bank lending capacity in our sample, equivalent to 1.1–1.6% of total GDP.

Design of adaptive Elman networks for credit risk assessment

The banks' need of quantitative approaches for credit risk assessment is becoming more and more evident, due to the introduction of the Basel agreements. To this extent, we define an Elman network approach to determine the insolvency of a borrower, and compare its performances with classical neural networks approaches for bankruptcy prediction. Then, we devise an adaptive procedure to select the best network topology, by performing a multi-objective analysis to take into account different compromises between conflicting criteria. We apply our procedure to different real and partly-artificial-case scenarios composed of Italian SMEs by using predictors coming from balance-sheet ratios, credit-history ratios and macro-economic indicators; then, we compare our approach to other ones proposed in the literature and to a standard logistic regression tool used by practitioners; last, given the recent research interest towards the use of qualitative predictors in credit risk assessment, we also apply our approaches on qualitative data. The results show that the Elman networks are effective in assessing credit risk and robust with respect to criteria and data, confirming the applicability of neural networks to bankruptcy prediction. Our contribution adds to the discussion of the ongoing debate about comparing neural networks to standard techniques: in particular, we find Elman Networks to lead to lower classification errors than standard feed-forward networks, whilst results from the comparison to logistic regression vary with respect to the error class considered. As for the data, we remark that the use of macro-economics indicators does not lead to particular improvement in classification accuracy, except when used to improve results coming from the use of qualitative variables only.

Determinants of European Bank Credit Default Swap Spreads

This paper analyzes the determinants of empirical credit default swap (CDS) spreads of European banks based on two different panel regression models. Previous studies primarily focus on non-financial firms. The Expected Default Frequency (EDF) is a statistically significant and economically important credit risk factor from the KMV structural model. The panel regression attributes more than 50% of the CDS spread variation to model-based EDF. Among bank-specific CAMELS indicators, a liquidity indicator and the return on assets are significant determinants. In addition to balance sheet ratios, the market-based EDF provides a substantial contribution to increasing the model’s explanatory power. Furthermore, the stock market index is an important market-wide indicator of the macroeconomic environment explaining European bank CDS spreads. This empirical study is the first finding an explanatory content of the EURIBOR-EUREPO, TED and five-year swap spread for CDS spread levels. With rising funding and liquidity risks or general risks to financial market stability, bank CDS spreads increase. Moreover, the EURIBOR-EUREPO and TED spread are able to increase the adjusted R-squared.

Eurozone Crisis and Banks’ Creditworthiness: What is New for Credit Default Swap Spread Determinants?

The article analyses banks’ credit default swap (CDS) spread determinants, in light of the Eurozone debt crisis. The attention to this aspect is due to the very linkage between banking and sovereign sectors particularly evident during the aforementioned crisis. The study is conducted on a sample of Eurozone banks over the period 2009–2014 through a feasible generalized least squares (FGLS) linear panel data regression. The variables adopted are both balance sheet ratios and macroeconomic factors. The main results confirm the attention pointed at the influence of public conditions to the banking sector, as proved by the significance of variables like the 10-year bond yields or the long-term sovereign rating. It is also interesting to observe the output dealing with public debt, which may suggest opportunities not only of investment but also of speculation for banks on the debt itself. Balance sheet ratios, instead, are not significant. Our study is an additional contribution to the strand of literature that analyses the strong interconnections between the riskiness of banks and the public sector and it is a suggestion to proceed the research with a deeper analysis on systemic risk and its impact on banking CDS spread.

Overall Financial Status with Reference to Noble Consolidated Glazings

A Study on the financial performance of the NOBLE CONSOLIDATED GLAZINGS LIMITED is intended to examine the current practices of financial performance. Hence, financial analysis is the starting point for making plans, before using any sophisticated forecasting and planning procedures. Understanding the past is a prerequisite for anticipating in future. The ways in which ratio analysis can help in long – range planning, budgeting, and asset management to strengthen financial performance and help avoid financial difficulties is explained. Types of ratios considered include balance sheet ratios, liquidity ratio, profitability ratio, proprietary ratios. The ability of an organization to analyze its financial position is essential for improving its competitive position in the market place. Through a careful analysis of its financial performance, the organization can identify opportunities to improve performance at the department, unit, or organizational level.

The Impact of Central Bank Liquidity Support on Banks’ Balance Sheets

We empirically analyse the relationship between longer term central bank liquidity support and banks’ balance sheet ratios, using difference-in-differences panel regressions and propensity score matching on a large sample of banks in the euro area. The research question is whether the liquidity operations, which were introduced to prevent disorderly deleveraging, can also be linked to unintended changes in banks’ funding policies and asset allocations. The results show that unconditional and conditional refinancing operations are associated with different developments on banks’ balance sheets. Unconditional longer-term refinancing operations went together with higher maturity transformation by banks in stressed countries, and also more carry trades, i.e. banks borrowing more while increasing their holdings of government bonds. In contrast, refinancing operations that were conditional on banks’ lending were not associated with such carry trades, highlighting the benefits of conditionality attached to long-term refinancing operations.

Conventional and unconventional balance sheet practices and their impact on currency stability

The principal objective of this study is to examine the different policy implications of balance sheet expansion and the impact on currency stability on a monthly basis. Balance sheets can evolve due to conventional and unconventional monetary practices, generally through foreign exchange reserve policies or by qualitative and quantitative easing. Monetary policy instruments are measured by different balance sheet ratios. Currency stability is captured by two methods, one focuses on monthly number of extreme currency fluctuations through the contravention of normal distribution at tails, and another utilises conditional volatility. The sample contains seven European central banks between 2006 and 2014: one manages a key currency, four has a safe haven currency while two of them are considered as an emerging currency. The key currency issuer central bank presented a significant interaction between its balance sheet ratios and currency stability only, where monetary expansion calmed its currency market.

Analysing Cross-Currency Basis Spreads

This paper investigates the drivers of cross-currency basis spreads, which were historically close to zero but have widened significantly since the start of the financial crisis. Credit and liquidity risk, as well as supply and demand have often been cited as general factors driving cross-currency basis spreads, however, these spreads may widen beyond what is normally explained by such variables. We suggest market proxies for EUR/USD basis swap spread drivers and build a multiple regression and cointegration model to explain their significance during three different historical periods of basis widening. The most important drivers of the cross-currency basis spreads appear to be short- and medium-term EU financial sector credit risk indicators, and to a slightly lesser extent, short- and medium-term US financial sector credit risk indicators. Another important driver is market volatility for the short-end basis spread, and the EUR/USD exchange rate for the medium term basis spread, and to a lesser extent, the Fed/ECB balance sheet ratio.

Il confronto di performance economico-finanziarie nelle Università: un possibile modello di analisi per indici

In Europe and in Italy, Universities are pressured to increase their performance. As a matter of fact, recently, several national governments have introduced quasi-market mechanism, pursuing the aim of encourage competition among Universities, improving efficiency, effectiveness and increasing economic viability. In this scenario, the practice of benchmarking is becoming more important as it provides a realistic approach for assessing the performance in critical areas for learning from the experience of other organisations. However, the majority of performance indicators only refers to the two main core activities of University (research and teaching), underestimating the economical-financial performances. The idea is to provide managers with a multidimensional performance evaluation system, which also consider the accounting dimension as an essential element to support strategic decisions. The paper aims to define a set of balance sheet ratios, which take into account the peculiarity of University management, meanwhile developing data-benchmarking process for monitoring and compare economic and financial dynamic in higher education institutions.

Why Responsible Investors Should Consider Islamic Criteria

This paper compares the risk-adjusted performance of responsible investment, Islamic investment and unconstrained portfolios across US, Europe and Asian equity markets. We provide evidence that negative screening accompanied with an Islamic investment philosophy outperforms responsible investment and unconstrained approaches. This paper supports earlier empirical conclusions that responsible portfolios based on negative sectors screens underperform an otherwise unconstrained portfolio. Further evidence is provided that Islamic investment approaches outperform unconstrained investment portfolios particularly during crisis periods. We validate possible reasons for the outperformance of Islamic constrained versus unconstrained portfolios and test robustness: We show that the Islamic balance sheet ratios and the exclusion of financials drive performance. The biases to growth and quality factors contribute to the outperformance of Islamic portfolios. The study provides additional insights linked to regional performance characteristics. As a conclusion, Islamic criteria have generated value not just for responsible but also for unconstrained investors.

Do Investors Adjust for Balance Sheet Risk that Should Be 'Off Balance Sheet'? Evidence from Cash Flow Hedges

We identify an item recognized on the balance sheet that distorts the assessment of default risk. Firms enter into derivatives to protect themselves from price fluctuations on a future purchase or sale commitment denominated in a commodity, foreign currency, or interest rate. There are two reasons why the accounting for these transactions creates difficulty in default risk assessments. First, while the fair value of the derivative is recorded at each balance sheet date, the value of the forecasted purchase or sale commitment is not recorded. Therefore, the balance sheet only tells half of the economic story. Second, the gains/losses associated with these derivatives provide a signal about future firm profitability, which is a determinant of default risk. We examine the extent to which debt investors, credit analysts, and equity investors understand the implications of these transactions for a firm’s default risk. Our results suggest that all three of these groups remove derivative amounts from firms’ balance sheet ratios when assessing default risk. However, only debt investors correctly price the implications of future profitability on default risk. Overall, our results suggest that the accounting for cash flow hedges distorts a firm’s leverage and profitability ratios, that not all investors adjust for this, and that capital market participants might benefit from more transparent hedging disclosures, particularly related to profitability.

Bagging ensemble models for bank profitability: An emprical research on Turkish development and investment banks

The purpose of this study is to find the determinants of the profits for the Development and Investment Banks (IaDB) in Turkey. In Turkish Banking System, the main financial source of the banks is the deposits, which constitute almost%60 of the balance sheet. As being a sub-group of the banking system, IaDB are not allowed to accept deposits in Turkey, which changes the total structure of the profitability compared to other banks. Till today, none of the relevant research was concentrated on the profit structure of the IaDB neither in Turkey nor in any other countries. Such research would fill that unexpectedly disregarded yet highly important gap.Therefore, to address this gap, quarterly financial data (10 balance sheet ratios) of 13 banks in the period of 2002Q4-2014Q3 were utilized. As a profit measurement among all other available measures, Return on Equity was chosen as dependent variable as it was the most used one as well as many other researcher have preferred as well. This study investigates the potential usage of bagging (Bag), which is one of the most popular ensemble learning methods, in building ensemble models, is used to predict the determinants of Turkish IaDB profitability. Three well-known tree-based machine learning (ML) models (i.e., Decision Stump (DStump), Random Tree (RTree), Reduced Error Pruning Tree (REPTree)) are deployed as base learner. This empirical study indicates that bagging ensemble models (i.e., Bag-DStump, Bag-RTree, Bag-MLP and Bag-REPTree) are superior to their base learners and could improve the prediction accuracy of individual ML models (i.e., DStump, RTree, REPTree).