Greater Financial Development Research Articles

Cross-listing and predation risk in product markets

This study examines the relationship between cross-listing and product market predation risk by using cross-listed firm-level data in both A and H shares. Results investigate that firms which cross-listing in different capital markets could significantly alleviate the threat of predatory from rivals in the product market. Consistent with competitive advantage and information asymmetry hypotheses, the mechanism analysis shows that higher competitive position and better subsequent corporate accounting information environment may lead to lower predation risk for cross-listed firms. Moreover, subsample evidence suggests that cross-listing is more likely to be used as a device to decline predatory threats in countries with incomplete markets with more government intervention, higher judicial civilization, and greater financial development. Cross-listing could also decrease the firms' stock price crash risk in the capital market. Lastly, research findings offer powerful evidence and references to firms in emerging markets attempting to cross-list in other developed markets.

Domestic barriers to entry and external vulnerability in emerging economies

Emerging economies (EMEs) exhibit high regulatory costs of firm creation. At the same time, lower firm-creation costs are associated with greater financial development and use of formal credit, which can expose EME firms to external financial shocks that propagate to EMEs via the banking system such as those that EMEs experienced during the Global Financial Crisis. We present evidence showing that in response to an adverse shock to the US banking system, EMEs with low firm-creation costs exhibit smaller contractions and earlier recoveries in cross-border bank flows, domestic bank credit, and GDP compared to EMEs with high firm-creation costs. A two-country model with banking frictions, cross-border bank flows, and endogenous firm entry can successfully capture this evidence. Our findings suggest that greater domestic credit-market deepening via lower barriers to firm entry in EMEs need not be associated with greater macro and domestic credit-market volatility.

Pathways to securing environmentally sustainable economic growth through efficient use of energy: a bootstrapped ARDL analysis.

Oman has traditionally relied upon natural gas and oil for meeting its domestic energy demand. As a result, despite growing economically, the level of carbon dioxide emissions in Oman has persistently surged; consequently, the nation has failed to ensure environmentally sustainable economic growth. Against this background, this current study aims to explore the impacts of energy consumption, energy efficiency, and financial development on Oman's prospects of attaining environmentally sustainable growth over the 1972-2019 period. The estimation strategy is designed to take into account the structural break issues in the data. Using the carbon productivity level as an indicator of environmentally sustainable economic growth, we find long-run associations amid the study variables. Besides, higher energy consumption and greater financial development are found to impede carbon productivity while improving energy efficiency is observed to boost carbon productivity in Oman. Therefore, it is pertinent for Oman to consume low-carbon and energy-efficient fossil fuels, improve energy efficiency levels, and green its financial sector to achieve environmentally sustainable growth.

The speed of adjustment in net operating working capital: an international study

ABSTRACT This paper analyses whether there are differences in the speed of adjustment in net operating working capital (NWC) across countries. Unlike prior research, which reported that the adjustment speed of any current item is always rapid, we find that the speed of adjustment to NWC targets depends on a country’s investor protection and financial development. Specifically, using a sample of firms from 30 countries, we show that NWC adjustment speeds vary across countries, and they are faster for companies that operate in countries with stronger investor protection and greater financial development.

Banking Sector Competition and Financial Development in Sub-Saharan Africa

The study sort to establishing a relationship between banking sector competition and financial development in subSaharan n Africa. The study further disaggregated the data used into Francophone and Anglophone countries, and these were examined separated and compared. Using an annual data on banks across 37 countries in Sub-Saharan Africa spanning the period 2001-2016 and employing the Fixed Effects estimation technique, the study revealed that there is a positive and significant relationship between financial development (FDCredit) and competition (CR3) for the full sample and the anglophone samples. The study further revealed that banking sector stability is essential for the financial development of both Anglophone and francophone countries within the sub-region. Macroeconomic variables did not have any impact on financial development generally except in francophone countries where exchange rates were found to have an impact on financial development. Bank-level variables such as ZSCORE, non-performing loans, profitability, liquidity and capitalization, on the hand had little impact in Anglophone countries on financial development compared to francophone countries. The study found that larger banks contribute positively to the development of the financial sector and banks tend to be bigger in Anglophone countries, and their banking sector is also more competitive than the francophone countries for the period used. Less emphasis should be placed on bank-level variables as these do not have significant impacts on the financial sector for Anglophone countries. Francophone countries should, however, control bank-level variables to ensure that they achieve greater financial development.
 Citation: Ricky-Okine, C. K., Amankwaa, T.and Anane, E.Banking Sector Competition and Financial Development in Sub-Saharan Africa,2020; 5(3): 58-85.
 Received: July 18, 2020Accepted: September 30, 2020

Clamoring for greenbacks: Explaining the resurgence of the U.S. dollar in international debt

AbstractThis paper characterizes trends of the shares of the U.S. dollar, the euro, and total foreign currencies in international debt denomination over the last two decades. We find that countries with a high output growth trend, greater financial development, better fiscal conditions, and more investment opportunities tend to decrease the extent of their reliance on the dollar, but increase that on the euro, while their dependency on total foreign currencies remains unaffected. Stronger trade ties with the United States (the euro area) contribute to a higher dollar (euro) share in the currency denomination of international debt securities. We also find that absent from the global financial crisis (GFC), the dollar (euro) share in debt denomination would have been higher (lower) than the observed shares in the postcrisis period. That suggests that the outbreak of the GFC increased the demand for the dollar as a safe haven.

The practice of and motivation for equity recycling: Evidence from the Asia-Pacific region

Equity recycling is the practice of contemporaneously raising equity and paying out to shareholders. We document evidence of equity recycling in the Asia-Pacific region. Exploiting variation in factors across Asia-Pacific markets, we find stronger evidence of recycling when financial constraints are not binding. Specifically, equity recycling is more prevalent in markets with greater financial development and during non-crisis time periods. Also, the practice is most pronounced for firms unlikely to face internal financial constraints. We also find evidence that equity recycling in the Asia-Pacific region is consistent with shareholders' interests and not a result of market timing by managers.

Financial development, unemployment volatility, and sectoral dynamics

We document a negative and significant relationship between domestic financial development and unemployment volatility in developing and emerging economies (DEMEs) and the absence of such relationship in advanced economies (AEs). A business cycle labor search model with firm heterogeneity, collateral constraints, and interfirm input credit capital can quantitatively rationalize these facts. Greater financial development is associated with lower usage of input credit capital, greater bank credit, and greater capital accumulation, all of which make firms more resilient in the presence of financial shocks. Firms’ increased shock resiliency stabilizes employment decisions, ultimately leading to smoother unemployment fluctuations. Then, by establishing explicit linkages between firms, interfirm input credit acts as an important mechanism that fosters lower volatility across firms under greater financial development. As such, increases in financial development have a smaller impact in stabilizing unemployment in economies with higher average bank credit-GDP ratios and less input credit usage, which is the case of AEs, compared to economies with lower average bank-credit GDP ratios and more input credit usage, which is the case of DEMEs.

A cross‐country study on the relationship between financial development and earnings management

Abstract This study investigates whether a country's level of financial development is associated with earnings management in an international setting. Financial development is likely to heighten the monitoring and scrutiny of accounting numbers because of strengthened investor protection laws and regulations as well as sophisticated market participants. Therefore, we first hypothesize that both accrual‐based and real earnings management decrease with greater financial development. However, research shows that managers tend to apply real earnings management, instead of accrual‐based earnings management, under strict accounting standards, regulations, and close auditor scrutiny. Thus, we explore the alternative hypothesis that accrual‐based earnings management decreases but real earnings management increases along with higher financial development. We examine the relationship between financial development and both types of earnings management using 56,830 observations in 37 countries covering the period 2009–2012. The results indicate that both types of earnings management are more restrained under higher levels of financial development.

The role of domestic financial and economic development in financial integration

ABSTRACTUsing two-step system generalized method-of-moments on an unbalanced panel of 75 countries from 1996 to 2010, this study shows that financial development’s effect on the pace of a country’s financial integration is conditional on economic development. Indeed, the results validate the observation that greater financial development conditioned on similar levels of economic development should precede closer financial integration.

The Terms-of-Trade Shock Duration and National Saving in the Developing Countries

The literature suggests that terms-of-trade (TOT) is a key determinant of the developing countries’ macroeconomic performance, including its likely impact on the level of national saving. The main objective of this paper is to examine the extent to which the TOT behavior contributed to changes in the saving rates across the developing countries. In doing so, the paper analyzes the TOT by conducting an empirical analysis of annual cross-country data for 57 developing countries for the period 1980–2010. We concentrate on the developing countries as problems stemming from fluctuations in TOT are likely to be more severe as the developing economies face restricted access to world financial markets with a greater magnitude than the advanced economies. The core aspect of our empirical analysis is that we utilize TOT shock duration and trend growth measures that have not been considered in the previous empirical literature. The trend growth is calculated using the smoothing procedure of Hodrick-Prescott (HP) filters. The shock duration is measured using the “half-life” of shocks. The empirical results of our models indicate that TOT trend growth and shock duration are important determinants of national saving in developing countries. Our results are robust to alternative estimation methods, time periods, sample construction, alterations in the control variables, sample coverage (e.g., the exclusion of larger exporters where one might fear the TOT are less likely to be exogenous). Our findings provide new evidence that permanent TOT shocks lead to changes in national saving rates. We also find that greater financial development and international financial integration mitigate the impact of TOT on national saving. Our findings add value to the existing empirical literature in terms of this new evidence and raises policy issues for the developing economies that are critical in terms of boosting their saving rates while ensuring stability in the trading environment. As a matter of policy, and to reduce the variability of TOT, developing countries should phase domestic economic reforms ought to be focused on achieving a diversified export structure. Closely allied to this, policy-makers need to formulate policies that improve the operation and facilitate the deepening of the domestic financial markets.

Terms-of-trade shock duration and national saving in the developing countries

The literature suggests that terms-of-trade (TOT) is a key determinant of the developing countries’ macroeconomic performance, including its likely impact on the level of national saving. The main objective of this paper is to examine the extent to which the TOT behavior contributed to changes in the saving rates across the developing countries. In doing so, the paper analyzes the TOT by conducting an empirical analysis of annual cross-country data for 57 developing countries for the period 1980–2010. We concentrate on the developing countries as problems stemming from fluctuations in TOT are likely to be more severe as the developing economies face restricted access to world financial markets with a greater magnitude than the advanced economies. The core aspect of our empirical analysis is that we utilize TOT shock duration and trend growth measures that have not been considered in the previous empirical literature. The trend growth is calculated using the smoothing procedure of Hodrick-Prescott (HP) filters. The shock duration is measured using the “half-life” of shocks. The empirical results of our models indicate that TOT trend growth and shock duration are important determinants of national saving in developing countries. Our results are robust to alternative estimation methods, time periods, sample construction, alterations in the control variables, sample coverage (e.g., the exclusion of larger exporters where one might fear the TOT are less likely to be exogenous). Our findings provide new evidence that permanent TOT shocks lead to changes in national saving rates. We also find that greater financial development and international financial integration mitigate the impact of TOT on national saving. Our findings add value to the existing empirical literature in terms of this new evidence and raises policy issues for the developing economies that are critical in terms of boosting their saving rates while ensuring stability in the trading environment. As a matter of policy, and to reduce the variability of TOT, developing countries should phase domestic economic reforms ought to be focused on achieving a diversified export structure. Closely allied to this, policy-makers need to formulate policies that improve the operation and facilitate the deepening of the domestic financial markets.

Capital Flows, De Jure vs. De Facto Financial Openness

This paper analyzes the relationship between de jure financial openness, and de facto financial openness. I use the Chinn-Ito index to proxy a country's legal arrangements regarding external transactions, and examine its relationship to actual realized international capital flows of various types and direction. I use a long panel, from 1980 until the start of global financial crisis, and include a large group of developed and developing countries. Linear panel data estimation methods, and two other regression models are used to explicitly examine the interaction of country attributes with policy. The first model uses interaction terms between legal financial openness and financial development or institutional quality to gauge whether these development attributes amplify or dampen the effect of legal opening on realized flows. The second model uses dummy variables for country sub-groups to assess whether threshold levels of development are important. I find that in general the relation between legal openness and realized international financial flows is weak. Some assets do respond to policy, others seem unaffected. In particular, the relationship is more powerful for financially developed countries. Using time series econometric methods to further investigate the connection between financial openness, domestic financial development and international financial integration, I look at the bank lending rate for five Asian economies. Rather than parity or convergence, I examine variance decompositions to assess the proportion of outside influence on domestic lending rates. The experience of Japan, South Korea and Indonesia support the conclusions arising from the panel analysis that greater financial development enhances integration.

Transmission of Real Exchange Rate to the Manufacturing Sector: Role of Financial Access

We explore the impact of Real Exchange Rate changes on the performance of Indian manufacturing firms over the period 2000-2012. Our empirical analysis shows that real exchange rate movements have a significant impact on Indian firms’ performance but the impact varies across different firm and industry characteristics. In particular the impact depends upon the degree of market power, trade orientation, foreign ownership, access to domestic finance and industry concentration. Further, appreciation and depreciation affect firms’ performance differently. Results from Panel-VAR confirm these findings. Overall, our results point towards the need for taking in to account firm and industry level heterogeneity in designing policies aimed at managing exchange rate shocks and also the role of greater financial development in currency risk management.

How Bank Competition Affects Firms' Access to Finance

Combining multi-year, firm-level surveys with country-level panel data for 53 countries, the authors explore the impact of bank competition on firms' access to finance. They find that low competition, as measured by high values of the Lerner index, diminishes firms' access to finance, while commonly-used bank concentration measures are not robust predictors of firms' access to finance. In addition, they find that the impact of competition on access to finance depends on the environment that banks operate in. Some features of the environment, such as greater financial development and better credit information, can mitigate the damaging impact of low competition. But other characteristics, such as high government bank ownership, can exacerbate the negative effect.

Investor Sentiment and Employment

We find that investor sentiment should affect a firm's employment policy in a world with moral hazard and noise traders. Using a large sample of international industry-level data for the period 1970-2003, we find support for the model's predictions. We show that higher sentiment among US investors leads to higher employment growth worldwide, especially in countries with greater financial development and industries that rely more on external finance. We also find evidence that sentiment induces greater job losses during financial crises, which supports the idea that financial development has a dark side.

Finance, Growth, and Institutions in Latin America: What are the Links?

Using a panel of 16 countries during the 1961-2010 period, we find that financial development has a positive significant ef fect on economic growth in the long run for high-income countries but a negative significant ef fect for low-income countries. When studying the determinants of financial development, we find that higher financial openness and lower country risk are associated with greater financial development. The financial risk index has a positive significant ef fect on financial development, while the economic risk index has a negative significant ef fect. In addition, lower foreign debt and better socioeconomic conditions increase financial development.

A Cross-Country Study on the Relationship between Financial Development and Earnings Management

This paper investigates whether a country’s level of financial development influences its earnings management in an international setting. It is likely that financial development heightens the monitoring and scrutiny of accounting figures, because of strengthened laws and regulations for investor protection and sophisticated market participants. Therefore, we first hypothesize that both accrual-based and real earnings management decrease with greater financial development. However, managers tend to apply real earnings management, instead of accrual-based earnings management, under strict accounting standards, regulations, and close scrutiny by auditors. Thus, we explore the alternative hypothesis that financial development decreases accrual-based earnings management but increases real earnings management. We examine the relationship between financial development and both types of earnings management by using 56,830 observations in 37 countries from 2009 to 2012. The results show that both types of earnings management are more restrained under higher levels of financial development.

Transmission Lags of Mentary Policy: A Meta-Analysis

The transmission of monetary policy to the economy is generally thought to have long and variable lags. In this paper we quantitatively review the modern literature on monetary transmission in transition and developed countries to provide stylized facts on the average lag length and the sources of variability. We collect 67 published studies and examine when prices bottom out after a monetary contraction. The average transmission lag is 29 months, and the maximum decrease in prices reaches 0.9% on average after a one-percentage point hike in the policy rate. Transmission lags are longer in developed economies (25{50months) than in transition economies (10{20 months). We find that the factor most effective in explaining this heterogeneity is nancial development: greater financial development is associated with slower transmission. Our results also suggest that researchers who use monthly data instead of quarterly data report systematically faster transmission.

How Bank Competition Affects Firms’ Access to Finance

Combining multi-year, firm-level surveys with country-level panel data for 53 countries, the authors explore the impact of bank competition on firms' access to finance. They find that low competition, as measured by high values of the Lerner index, diminishes firms' access to finance, while commonly-used bank concentration measures are not robust predictors of firms' access to finance. In addition, they find that the impact of competition on access to finance depends on the environment that banks operate in. Some features of the environment, such as greater financial development and better credit information, can mitigate the damaging impact of low competition. But other characteristics, such as high government bank ownership, can exacerbate the negative effect.