Financial Variability Research Articles

Debtors at Play: Gaming Behavior and Consumer Credit Risk

Exploiting a unique high-frequency, individual-level database, we (1) construct individual-level, incentive-compatible proxies of impulsivity based on video gaming behavior and (2) use these proxies to evaluate predictions concerning how impulsivity shapes individuals’ responses to a relaxation of credit constraints as captured by receiving a credit card. We discover that precard gaming intensity—as measured by the frequency and amount of game expenditures—is strongly and positively associated with (a) the probability of defaulting on credit card debt in the future, (b) postcard expenditures on luxury and addictive items, (c) surges in consumption spending immediately after receiving the credit card, and (d) rapid debt accumulation after obtaining the card. Differences in financial literacy, income, income variability, education, and demographics do not drive the results. The results are consistent with (1) neurological and psychological studies stressing that excessive gaming is associated with impulse control deficiencies and (2) behavioral theories stressing that impulsivity, i.e., time-inconsistent preferences for immediate gratification and ineffective strategies for avoiding myopic cues and temptations, substantially influence individual expenditure patterns and borrowing decisions when liquidity constraints are relaxed. This paper was accepted by Kay Giesecke, finance. Funding: C. Lin acknowledges the financial support from the National Natural Science Foundation of China [Project 72192841] and the Research Grant Council of the Hong Kong SAR, China [Project T35-710/20-R]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4931 .

The global financial crisis and variability in the stock price index in India: a vector error correction model approach

The global financial crisis and variability in the stock price index in India: a vector error correction model approach

Impact of Financial Leverage Variability on Economic Value Added: A Relational Model to Visualize Sustainable Growth of Business in the Long Run

Impact of Financial Leverage Variability on Economic Value Added: A Relational Model to Visualize Sustainable Growth of Business in the Long Run

Species, space and time: A quarter century of fishers' diversification strategies on the US West Coast

AbstractDiversification within fisheries operations can serve as an important form of self‐insurance against natural, regulatory and market risks to fishers' livelihoods. Diversification can take many forms, and yet the literature has primarily emphasised diversification across species to the exclusion of spatial and temporal dimensions of diversification. We analyse trends in diversification across species, space and time for all fishers along the entire continental West Coast of the United States from 1990 to 2015. Our findings reveal the importance of untangling both compositional (i.e. driven by changes in fleet composition) and individual (i.e. driven by within‐owner changes in diversification strategies) dimensions of diversification by showing how these effects have moved in contrary directions for all three forms of diversification. We also demonstrate how increases in temporal diversification have overwhelmed the overall stability of species and spatial diversification to leave the current fleet less exposed to financial variability compared to in the early 1990s.

Financial variability of the second cutting of forest management in Tapajós National Forest, Brazil

Timber production in sustainable forest management must be carried out in periodic cycles, respecting the forest's resilience. However, logging is based on old-growth forests, and little is known about logging beyond the first cutting cycle. The study investigated the financial feasibility of the second cutting cycle carried out in the experimental area of Tapajós National Forest, Pará, Brazil. We use deterministic methods to assess financial viability (Net Present Value, Annualized Net Present Value and Average Production Cost) and Monte Carlo simulation for estimate the probability of Net Present Value occurrence. The second cutting cycle was considered a financially unfeasible investment. Forest management would have achieved financial viability if it had the maximum productivity allowed by law. The low productivity of the area, resulting from hollow trees, contributed to the unfeasibility of the investment. The low market value was a consequence of the high proportion of species with low commercial value and smaller size of managed trees. The period of 35 years between the cutting operations was enough for the recovery of the forest volume in the study area, but not for the financially viability of the forest management. Cutting cycles with a longer time interval and less cutting intensity are strategies that will allow the establishment of species with greater commercial value and dimensions adequate to market requirements, fundamental factors for the profitability of forest management in successive cycles.

Global financial crisis and variability in the stock price index in India: A vector error correction model approach

Global financial crisis and variability in the stock price index in India: A vector error correction model approach

Sun Pharmaceutical Industries Ltd: A Study of Financial Movement during Pandemic Times

Sun Pharmaceutical Industries Ltd is the Indian MNC based in Mumbai with largest market capitalization amongst the Indian Pharma companies. The study focuses on the study of the various parameters of financial performance and risk measurement of Sun Pharmaceuticals Industries Ltd during the challenging time of Covid era. The financial variability of return using the Value at Risk concept based on the historical movement of the daily return has been analyzed to understand the trend of the risk related to the variability in return. Also, the trend analysis has been used to analyze the movement of various fundamental financial parameters like Net Income, Operating Income Margin, Net Income Margin

How young companies can effectively manage their slack resources over time to ensure sales growth: the contingent role of value-based selling

This research aims to bridge the entrepreneurship and marketing/sales literature streams by studying how young firms enable their resource endowments using value-based selling. Drawing on effectuation logic, the authors examine how young firms can achieve sales growth by using human and financial resource slack during the early years of their existence and accounting for the impact of the variability of these resources over time. The integrated framework and hypotheses are tested using unique, multisource (survey and objective archival) longitudinal panel data from 71 young firms covering a seven-year period. As anticipated, the findings show that both financial and human resource slack are negatively related to young firms’ sales growth over time and that financial resource slack variability exerts a positive impact and human resource slack variability exerts a (nonsignificant) negative impact. The results also confirm the importance of value-based selling as a guiding mechanism that significantly alters the effects of both types of resource slack and their variability over time. While value-based selling can help a young firm use slack to grow more effectively, it also has a dark side in that it can stand in the way of risk taking.

Political origins of financial structure in developing countries

AbstractThe structure of the financial system refers to the way funding is shared between banks and financial markets. This paper investigates the determinants of the financial structure variability across emerging economies. It particularly seeks to study the effects of democratic versus autocratic political regimes on the financial system structure. The results provide evidence that democracy is associated with higher market‐based financial systems. In this line, democracy tends to promote financial systems where stock markets are more active and efficient than banks. Therefore, policymakers are recommended to strengthen democratic institutions through reinforcing political rights and civil liberties, as part of a strategy of stock markets development.

Capital Structure and Financial Performance: A Case of Saudi Petrochemical Industry

The study investigates and measures the impact of capital structure, profitability and financial performance on the success of the business organization. Capital structure of the business organization refers to the proportion of external funds and internal funds, i.e., debt and equity. In Saudi Arabia, petrochemicals companies are working on equity, but financial performance reflects negative trend for the period 2004 to 2016. The research is based upon secondary data available on the websites of petrochemicals companies of Saudi Arabia. Financial Ratio variability analysis and Trend Indices of financial ratios (TI_CBI) measure and compare the financial variability and sensitivity of financial ratios of the business organization. Correlation between Trend Indices (TI_CBI) of independent variable and dependent variables are to be calculated to know the impact of changes in debt equity on other dependent variables. The results reveal the unexpected performance of petrochemicals companies due to under-utilization of the resources caused by low demand and lower prices of the products governed by some internal and external factors. The study finds that size, demand, cost of production, profitable streams of products, and low cost capital in external funds are the factors responsible for overall growth development of the petrochemicals industry of Saudi Arabia.

Microfoundations for Performance, Competition and Econometric Implications

We consider two agency-theory-based structural models and a reduced form model of bank inefficiency. The two structural models assume that the inefficiencies and quantities are sequentially and simultaneously determined, respectfully. The reduced form model assumes that inefficiency of a bank depends on other banks' inefficiencies. We argue that conventional stochastic frontier models would give inconsistent parameter estimates as they ignore systematic nature of managerial decision making process. We estimate the inefficiencies of Eurozone banks using our novel structural and reduced form approaches that calls for certain MCMC techniques. Bayes factor favors the sequential model where the efficiency is determined first. In the empirical application for the Eurozone, we find a pick in structural and non-structural inefficiency after the financial crisis and considerable variability across Member States. A way of tackling such banking imbalances is to move towards a banking union.

On the cost of capital in inventory models with deterministic demand

In the operations management literature, the financial risk in an inventory model is usually assumed to be captured by the (constant) weighted average cost of capital (WACC) of the firm. This assumption is, at best, an approximation, since this cost depends on the risk of the cash flows, which, in turn, depends on the inventory policy. We investigate what the right cost of capital should be in an inventory model with deterministic demand. To do so, we study an inventory model with a generic inventory cost function where risk depends on the inventory decision made. Additive and multiplicative financial noise functions are included to assess the impact of these on both the cost of capital of the firm and the optimal inventory policy. We find that, in contrast to previous models, risk is not in general a monotone function of inventory. Also, a rate close to the risk-free rate, which typically deviates significantly from the WACC, should be used to value inventory-related investments when the inventory cost function is dominated by holding cost for large order quantities, even if investments are subject to other sources of financial variability.

STUDI KETERKAITAN ANTARA DIVIDEND PAYOUT RATIO, FINANCIAL LEVERAGE DAN INVESTASI DALAM PENGUJIAN HIPOTESIS PECKING ORDER.

This study is aimed to examine the prediction of pecking order hypothesis in Indonesian. The hypothesis states that there is negative relationship between dividend payout ratio and investment. In addition, this study will learn the relationship between dividend payout ratio, financial leverage and investment. The dividend payout ratio determinants are financial leverage, investment, liquidity, profitability, size and variability of earnings. The financial leverage determinants are dividend payout ratio, investment, profitability, size, assets structure and variability of earnings. The determinants of investment are dividend payout ratio, financial leverage, sales growth, profitability, Q ratio and size. The data of this study is collected from 70 manufacturing companies as listed in the Jakarta Stock Exchange for the period of 1991 – 2000. The three stage least square simultaneous equation model is used to learn the relationship between dividend payout ratio, financial leverage and investment. In this study, it is found that there is no significant evidence that manufacturing companies in Indonesia tend to follow the pecking order hypothesis. In addition, it is found that the financial leverage gives a negative and significant influence on dividend payout ratio and vice versa; investment do not give a significant influence on dividend payout ration and vice versa; investment gives a positive and significant influence on financial leverage; and financial leverage do not give a significant influence on investment. Keywords: pecking order, dividend payout ratio, financial leverage, investment

FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: A NEW INVESTIGATION

This article applies a Bayesian dynamic factor model to examine the relationship between financial development and economic growth from a new angle. We estimate the common, country, and idiosyncratic factors that drive the dynamics and co-movement of financial development and economic growth across 89 countries in three different income groups, namely industrial countries (INDs), emerging market economies (EMEs), and other developing countries (ODCs), over the period 1970 to 2009. The results indicate that the common factor plays a more significant role in explaining the variance of output growth in INDs and EMEs, but not in ODCs. In contrast, financial development variability is mainly driven by the country and idiosyncratic factors. We also analyze the relation between country characteristics and the relative importance of the factors.

Flexible Exchange Rate, Financial Development and Economic Performance in Malaysia: An Econometric Analysis

In this paper evidence on whether Malaysia’s, Bank Negara policy of allowing flexible exchange rate along with financial development has affected the volatility of real macroeconomic variables like trade, foreign investment and economic growth is presented. An econometric framework is also utilized to examine the linkages between the exchange rate and the real economy. Different indicators of financial development and exchange rate variability are used. Results are found to vary with the indicators used. Correlation matrix shows that Variability in real effective exchange rate has an adverse effect on the inflow of FDI and economic growth. While the development of Capital market has a positive correlation with FDI, trade and economic growth. Credit to the private sector by the financial institutions has a positive impact on the international trade intensity. Regression results show that variability in exchange rate has a significant negative impact on economic growth. While its effect on trade intensity is not conclusive.

Forecast Evaluation of Explanatory Models of Financial Return Variability

A practice that has become widespread and widely endorsed is that of evaluating forecasts of financial variability obtained from discrete time models by comparing them with high-frequency ex post estimates (e.g. realised volatility) based on continuous time theory. In explanatory financial variability modelling this raises several methodological and practical issues, which suggests an alternative approach is needed. The contribution of this study is twofold. First, the finite sample properties of operational and practical procedures for the forecast evaluation of explanatory discrete time models of financial variability are studied. Second, based on the simulation results a simple but general framework is proposed and illustrated. The illustration provides an example of where an explanatory model outperforms realised volatility ex post. --

The effect of exchange rate variability on US shareholder wealth

We examine the relationship between financial crisis exchange rate variability and equity return volatility for US multinationals. Empirical analysis of the major financial crises of the last decades reveals that stock return variability increases significantly in the aftermath of a crisis, even relative to the increase in stock return volatility for other firms belonging to the same industry and market capitalization class. In conjunction with this increase in total volatility, there is also an increase in stock market risk ( β) for multinational firms. Moreover, trade and service oriented industries appear to be particularly sensitive to these changing exchange rate conditions.

Forecast Evaluation of Explanatory Models of Financial Variability

AbstractA practice that has become widespread and widely endorsed is that of evaluating forecasts of financial variability obtained from discrete time models by comparing them with high-frequencyex postestimates (e.g. realised volatility) based on continuous time theory. In explanatory financial variability modelling this raises several methodological and practical issues, which suggests an alternative approach is needed. The contribution of this study is twofold. First, the finite sample properties of operational and practical procedures for the forecast evaluation of explanatory discrete time models of financial variability are studied. Second, based on the simulation results a simple but general framework is proposed and illustrated. The illustration provides an example of where an explanatory model outperforms realised volatilityex post.

Forecast Evaluation of Explanatory Models of Financial Variability

Forecast Evaluation of Explanatory Models of Financial Variability

Child Labor: The Role of Financial Development and Income Variability across Countries

In this article, we examine the link between child labor and financial development using cross‐country data. We show that child labor and financial development display a significant negative relationship, which is particularly strong in the sample of low‐income countries and is robust for a wide range of specifications and estimators, including fixed‐effects and instrumental variables. We identify a plausible channel through which financial development affects child labor, as we find that income variability has a sizable, positive impact on child labor in countries where financial markets are underdeveloped, although this is not the case when financial markets are developed. Our results suggest that policies aimed at widening access to credit could be effective in reducing the extent of child labor.