Higher Solvency Research Articles

Ethical transparency in business failure prediction: uncovering the black box of xgboost algorithm

ABSTRACT This paper introduces an innovative machine learning model, built upon the robust and interpretable Extreme Gradient Boosting (XGBoost technique), to predict business failure. The study uses the VADIS financial strength indicator, from ORBIS, in a sample of 3,806 Spanish firms. The empirical analysis demonstrates that higher solvency, profitability, and reduced indebtedness correlate with a lower propensity for business failure. The model offers a powerful tool for early detection and intervention in financial distress, helping prevent insolvency. This study extends its focus to the ethical dimensions inherent in the application of machine learning algorithms. It attempts to demystify the proverbial ‘black box’ nature of such techniques, shedding light on their ethical foundations. By demonstrating the transparency and interpretability of the XGBoost model, we address the ethical concerns often associated with the ‘black box’ nature of machine learning algorithms.

Increasing or Decreasing Scale? The Pros and Cons of Farm Size for Financial Sustainability

The article focuses on the question of optimal farm size in the context of contemporary agricultural challenges such as rapid population growth, climate change, and limited natural resources. The analysis shows that farm economic size can have a significant impact on financial performance indicators including productivity, profitability, liquidity, solvency, and sustainability. The article provides a detailed overview of the pros and cons of different farm economic sizes and their impact on financial sustainability, drawing on academic literature, available data, and statistical methods. The results indicate that larger farms have lower factor productivity but higher solvency. Smaller farms on the other hand have higher profitability and productivity. Medium-sized farms are characterized by high liquidity and financial autonomy.

Financial Performance (Dis)parity in Post-transition Europe

Decades after the transition processes have spread across Central, Eastern, and South-Eastern Europe (CESEE), the former Soviet Union, and the Baltic, it was interesting to perform the post-transition and non-transition advanced European economies comparison to capture the outcomes of the 'catching-up process' . In this analysis, I tried to reach the results of this ‘catching process’ using the firm-level accounting data, namely, enterprises' annual accounts rather than countries' national accounts. The goal was to evaluate if post-tran- sition countries' enterprises have reached the financial performance of non-transition countries' enterprises across Europe, three decades after the transition processes began. The research captured firm-level financial performance aspects revealing some differentiators, namely, financial report indicators that differed for the enterprises belonging to post-transition countries in comparison with the ones belonging to non-transition countries in Europe. The findings related to the liquidity, solvency, indebtedness, profitability indicators, and labor intensity ratio were derived by logit regression models. The observations for 569 European companies were provided by Orbis Europe for the year 2021 annual accounts. According to the results, enterprises in post-transition countries, characterized by lower total assets and working capital scale, were likely to have lower profit margins, share of employees’ costs in operating turnover, current ratio, and gearing, while higher solvency and liquidity ratio. Mild marginal effects indicated the gap narrowed but with still existing significant disparities, particularly in the field of liquidity.

Do financial asset holdings affect investor expectations under negative events? The shock of COVID-19 pandemic

Holding excessive financial assets will lead to corporate financialization, making investors underestimate its risks in front of extreme benefits and the “reservoir effect” in boom periods, especially in rapid-growing emerging economies. Few studies have explored the investors’ real perceptions and attitudes towards such risks when dealing with unexpected shocks. The 2019 novel coronavirus disease (COVID-19) provides new insights into these questions. Using event study method, this study examines how investors react to corporate financialization in the risk-release condition. First, we find that firms with more financial asset holdings experience significant lower market return during the COVID-19 pandemic. Second, we find that the pandemic-induced drop in stock returns is milder when firms hold more low-liquidity or safe financial assets, have higher solvency, are less exposed to COVID-19 pandemic and have better information environment. These findings show that the investors’ attitude is widely negative towards corporate financialization when the negative shock comes and strong financial flexibility and good corporate governance can alleviate the risk. It implicates that the hidden risks of corporate financialization can be perceived by investors and responded by “voting with their feet” and the managers should be alert to it rather than just seeking financial benefits.

The relative financial performance of African American farms in the United States since the Great Recession

AbstractUsing data from the 2009–2020 Agricultural Resource Management Surveys, we compare the financial position and performance of African American farms to that of other U.S. farms. The results suggest that, relative to others, the average African American farm has lower total value of production, net cash farm income, government payments, assets, and debts. We obtained mixed results regarding financial performance, with African American farms having lower profitability, liquidity, and efficiency than others but higher solvency. To our knowledge, this study is the first to provide a contemporary overview of the status of African American farms using detailed, farm‐level financial data.

In search of default risk predictors in emerging Asia

ABSTRACT The study analyses the potential idiosyncratic factors and their pull and push effects on firm-level default risk using 540 listed and traded Asian firms during the period of 2010–2019. The lucrative returns and investment opportunities in Asian markets invites attention for potential research in this domain. Default risk is derived from the Merton model after adjusting for emerging market vulnerabilities. Using fixed-effect panel data regression modelling, we found that higher solvency and operating efficiency are the key pull factors that keep the firms away from default. In the long run, expansion potential and sustainability are key factors that pull the firms out of default. Conversely, a higher level of expansion potential, idiosyncratic volatility and size-effects push low-grade firms towards default despite having a higher level of operating efficiency. We conclude that low-grade firms must therefore keep a close eye on idiosyncratic factors in order to avoid default.

Predicting Organizational Mortality: How Financial Management Matters

Managing financial resources is one of the most important responsibilities of every organization; however, the literature still cannot provide an answer to an important question: how does financial health matter to organizational mortality, especially for nonprofit organizations? To advance our knowledge in this regard, this study empirically examines the effects of solvency, profitability, margin, and liquidity on nonprofit dissolution. Higher solvency, profitability, and margin have significant effects on reducing the likelihood of nonprofit dissolution, but liquidity does not function as a significant predictor.

Voluntary Disclosure of GRI and CSR Environmental Criteria in Colombian Companies

The study analysed the asymmetry in the disclosure of environmental criteria of the Global Reporting Initiative (GRI) standard based on financial and non-financial information in 37 companies in 19 sub-sectors of the Colombian economy that were assessed by MERCO (Business Monitor of Corporate Reputation) in 2017 and 2018 in terms of corporate reputation, responsibility, and corporate governance. It is based on the theories of agency, stakeholders, and legitimacy, whereby six hypotheses were postulated. The indicators of environmental criteria were retrieved from the website and sustainability reports of each company, using a dichotomous approach for collecting information on environmental activities. The hypotheses were contrasted with a binary choice and panel data models. The results showed that increasing quality and transparency in voluntarily disclosed information decreases its asymmetry, thereby meeting the information needs of stakeholders, providing confidence, and strengthening corporate social responsibility (CSR) activities. In addition, the most indebted and largest companies disclose less information on environmental activities, in contrast to companies with higher solvency. Overall, the study contributed with the calculation of an asymmetry ratio with the MERCO indicators and the use of the insolvency risk variable as an explanatory variable for disclosure. Additionally, it contributed to the field of study of CSR from the Latin American context.

Firm survival in new EU member states

We analyze firm survival determinants in four new European Union member states (the Czech Republic, Hungary, Poland and Slovakia). We employ the Cox proportional hazards model on firm-level data for the period of 2006–2015. We show that in all four countries, less concentrated control of large shareholders, higher solvency and more board directors are linked with an increased probability of firm survival. However, an excessive number of board directors has a detrimental effect. Firms with foreign owners and higher returns on their assets exhibit better survival chances. Conversely, across countries and industries, larger firms and those hiring international auditors have lower probabilities of survival. A number of specific determinants influence firm survival in different ways, emphasizing the importance of country and industry differences when studying firm survival. We also document that, in an economic sense, determinants associated with the legal form, ownership structure and corporate governance show the most beneficial effects with respect to firm survival.

Profitability Determinants of Financial Institutions: Evidence from Banks in Pakistan

The aim of this study was to analyze the impact of bank-specific, industry-specific and macroeconomic variables on the profitability of banks in Pakistan. This study applied the two-step generalized method of momentum (GMM) system estimator on an unbalanced dynamic panel of 28 banks over the latest period 2007–2016. The robust results reveal that the bank’s profitability in Pakistan is explained by size, higher solvency, financial structure, operating cost, labor productivity, market power, and economic growth. We also found an inverted U-shape relationship between banks size and profitability. Herfindahl–Hirschman Index (HHI) was applied to evaluate the impact of market power and found results in support of Structure Conduct Hypothesis. On the other hand, credit quality, operational efficiency, banking sector development, inflation, and industry concentration are found to be negatively and significantly related to the profitability of banks. Further, this study found lower profitability of banks during the government transition. The Mean comparison of profitability indicates that specialized banks (SB) in Pakistan are generating higher net interest margin (NIM) than all commercial banks (ACB). However, the empirical results of this study are robust and consistent with previous literature.

The relationship between insurer solvency and reinsurance: evidence from the Taiwan property-liability insurance industry

This study examines the relationship between insurer solvency and reinsurance. Taiwan provides an interesting environment for studying this issue with its relatively shallow market and natural catastrophe risk in the property-liability (P/L) insurance industry. The results of this investigation suggest that insurer solvency and reinsurance are interdependent. I find that insurers with higher solvency tend to purchase more reinsurance, and insurers with higher reinsurance dependence tend to have a higher level of solvency. Other empirical results show that underwriting risks, business concentration, return on investment (ROI) and business mix have a significant impact on reinsurance. Furthermore, I also find that insurers used less reinsurance after the RBC regime. In addition, firm size, return on asset (ROA), ROI, marine insurance, financial holdings and listed firms have a significant influence on an insurer's solvency. My results have practical implications for the P/L insurance industry and competent authorities in Taiwan.

Corporate Governance And Bank Performance: Islamic Versus Non-Islamic Banks In GCC Countries

The literature on corporate governance at corporations and conventional banks is extensive; however, it does not assign proper weight to Islamic finance institutions despite their growing importance in the global financial system. Important questions that are still unexplored to date include: What are the attributes of the corporate governance mechanisms at Islamic finance institutions? and How do their corporate governance attributes affect their performance and risk taking behavior? To answer these questions, we use an exhaustive sample of Islamic and non-Islamic banks in the Gulf Cooperation Council (GCC) region, in the years 2007 to 2009, i.e., around the global financial crisis of 2008 which represents a natural stress test. We assess the impact of the corporate governance characteristics ownership structure / concentration, board of directors' size, composition, and independence and the effectiveness of the legal system and investor protection of the country on a wide array of bank performance indicators, including profitability, efficiency, asset quality, and risk. We perform univariate and multivariate tests which control for many potentially confounding effects. Our results show that, during the 2008 global financial crisis, the return on assets and operating income-to-total assets were significantly higher at Islamic banks compared to non-Islamic banks in the GCC region by more than 1 and 2.5 percent, respectively. Islamic banks also exhibited a more prudent risk-management behavior and higher solvency than non-Islamic banks. Moreover, consistent with the notion of the importance of corporate governance, asset-productivity at Islamic banks is significantly increasing in family- and foreign-ownership and the effectiveness of the legal system and investor protection, and it is decreasing in board size and insiders. Furthermore, risk-taking behavior at Islamic banks is decreasing in government- and family-ownership and the investor-protection level in the home country. This study has important practical implications. Investors may consider including Islamic banks in their portfolios given their resilience to the financial crisis. Non-Islamic financial institutions may consider adopting some of the features of Islamic banking into their operating models. Policy makers can use our results for better policy formulation and regulation of their financial system.

Влияние ликвидности и платежеспособности на использование ковенантов в проспектах эмиссий корпоративных облигаций эмитентов из стран БРИКС

Ковенанты не только обеспечивают преимущества от смягчения агентского конфликта, связанного с долгом, включая проблемы недофинансирования, замещения активов и размытия долговых обязательств, но и создают издержки за счет уменьшения управленческой и финансовой гибкости. Ковенанты могут служить субститутами некоторым параметрам облигаций, таким как опцион на покупку, конвертируемость или срок погашения,которые также могут помочь в смягчении агентского конфликта.В данной статье представлены результаты эмпирического анализа влияния двух факторов финансовой неустойчивости – ликвидности и платежеспособности – на использование ковенантов в проспектах эмиссии 225 публичных облигационных выпусков эмитентов из стран БРИКС. Нами было выявлено значимое влияние платежеспособности, которая показывает достаточность денежного потока компании погашать свои долгосрочные обязательства, на использование различных типов ковенант увеличении платежеспособности эмитенты реже ограничивают себя в возможности выпуска последующего долга, смене управления, а также используют в проспектах условие досрочного погашения при изменении рейтинга облигационного выпуска. Проспекты отзывных облигаций и облигаций с рейтингом ниже BBB – по классификации Standard & Poor’s (высокодоходные или мусорные облигации) – содержат большее количество ковенантов, ограничивающих выплаты дивидендов и выпуск последующего долга.Наши результаты схожи с результатами, полученными ранее другими авторами на рынках США, Китая и Бразилии. Однако в проспектах российских эмитентов реже встречается запрет на обратную аренду, они не так часто ограничивают себя в выпуске последующего долга, смене управления и не используют условие досрочного погашения при понижении кредитного рейтинга эмитента. Это может быть связано с тем, что пассивные ковенанты не имеют юридической силы в соответствии с законодательством Российской Федерации.

Drivers of Performance in the Indian Banking Sector: A Discriminant Analysis Approach

Commercial banks play an important intermediation role by investing in financial assets. The paper first analyses the banks on the basis of the computed Hannan Henweck G score. Further, discriminant analysis is used to find significant drivers of performance in banks including the G score. Although, being rigorous in computation, discriminant analysis technique helps us in capturing all the crucial information in one composite score. Division of banks into high and low-performing zone helps us identify significant drivers of performance in Indian banks. Use of multivariate statistical measure signals towards higher solvency score and greater credit risk to become a high performer. Classification precision of 86% is achieved thereby signalling towards the relevance of the study.

A Simple Model of Bank Behaviour—With Implications for Solvency Regulation

A simple model of bank behaviour is shown to have implications for solvency regulation of the Basel type. The investment division seeks to maximize RORAC, with higher solvency S lowering the cost of refinancing but tying costly capital. In period 1, exogenous changes in expected returns d[Formula: see text] and in volatility d[Formula: see text] occur, causing optimal adjustments dS*/ d[Formula: see text] and dS*/ d[Formula: see text] in period 2. In period 3, the actual adjustment dS* creates an endogenous trade-off with slope d[Formula: see text]/ d[Formula: see text]. Basel-type regulation modifies this slope, inducing senior management to opt for a higher value of σ in several situations. Solvency regulation can thus run counter its stated objective.

Solvency Regulation of Banks and Insurers: A Two-Pronged Critique

This paper puts forth two models, one of a bank and one of an insurer. Their divisions responsible for investment (and risk underwriting, respectively) seek to maximize the expected risk-adjusted rate of return on capital (RAROC). For the bank, higher solvency lowers the cost of refinancing; for the insurer, it attracts more premium income. In both cases, however, higher solvency ties costly capital. Sequential decision making is tracked over three periods. In period 1, exogenous changes in expected returns and in volatility occur, each suggesting optimal adjustments in solvency. However, there can be only one adjustment, which in period 3 creates an endogenous trade-off between expected returns and volatility. This tradeoff is shown to involve parameters that differ between banks and insurers, calling for bank-specific and insurance-specific solvency regulation. In addition, Basel I and II (Solvency I and II, respectively) are shown to modify this tradeoff, inducing senior management of both banks and insurers to opt for higher volatility and lower solvency than otherwise. Therefore, existing solvency regulation can run counter their stated objective in both cases, which quite likely is also true of Basel III and Solvency III.

PRICING AND SOLVENCY OF VALUE-MAXIMIZING LIFE ANNUITY PROVIDERS

AbstractThis paper provides a detailed quantitative assessment of the impact of capital and default probability on product pricing and shareholder value for a life insurer providing life annuities. A multi-period cash flow model, allowing for stochastic mortality and asset returns, imperfectly elastic product demand, as well as frictional costs, is used to derive value-maximizing capital and pricing strategies for a range of one-year default probability levels reflecting differences in regulatory regimes including Solvency II. The model is calibrated using realistic assumptions. The sensitivity of results is assessed. The results show that value-maximizing life insurers should target higher solvency levels than the Solvency II regulatory one-year 99.5% probability under assumptions of reasonable levels of policyholder's aversion to insolvency risk. Even in the case of less restrictive solvency probabilities, policyholder price elasticity and solvency preferences are shown to be important factors for a life insurer's value-maximizing strategy.

Solvency Capital, Pricing and Capitalization Strategies of Life Annuity Providers

This paper provides a detailed quantitative assessment of the impact of solvency capital requirements on product pricing and shareholder value for a life insurer. A multi-period firm value maximization model for a life annuity provider, allowing for stochastic mortality and asset returns, imperfectly elastic product demand, as well as frictional costs, is used to derive optimal capital and pricing strategies for a range of solvency levels reflecting differences in regulatory regimes. The model is calibrated using realistic assumptions and the sensitivity of results assessed. The results show that value-maximizing insurers should target higher solvency levels than the Solvency II regulatory 99.5% under assumptions of reasonable levels of policyholder’s aversion to insolvency risk. Even in the case of less restrictive solvency regulation, policyholder price elasticity and solvency preferences are shown to be important factors for a life insurer’s profit maximizing strategy.

The Impact of Economic Capital on the Optimal Funding Equation for a Bank

This paper develops a framework for examining the impact of changes in the solvency standard of a bank (target credit rating) on the pricing of bank assets. We show that the decision of a bank to increase its solvency standard increases the price of bank assets to the extent that a bank prices its assets in order to earn a minimum return on target economic equity. However, a higher credit rating should also reduce the cost of rated-debt that a bank uses to fund its assets. We develop a loan pricing model to assess the breakeven point at which the impact of a higher solvency standard on bank asset prices is matched by the reduction in the cost of rated-debt, and compare our theoretically-derived results to actual credit spreads on bank debt rated by Standard and Poor's in order to determine the if there is an optimal credit rating for a bank. Our model uses a beta distribution to derive the capital multiplier necessary to determine the target economic equity for the bank. We vary the proportion of rated-debt funding the bank's assets. We also assess the impact of changes in the hurdle rate used to price bank assets, where the hurdle rate is varied in line with changes in the leverage of the bank. Our paper shows how target credit rating, funding mix and hurdle rates interact to determine the optimal asset mix for a bank. The paper also demonstrates the significance of the distribution assumptions used to determine the economic capital for a bank.

Financial Performance and Efficiency of Corporate Farms in Northwest Russia

The corporate farms in Leningrad Oblast are classified into five solvency groups by an index of financial health based on the coverage of farm costs by sales revenue. The two highest solvency groups containing 35% of the oblast farms produce 75% of sales and generate 90% of profit. They rapidly grow by investing in machinery and equipment and can be regarded as having fully adapted to the new market conditions. Their production efficiency is significantly higher than the efficiency of less solvent farms. A regression analysis shows that 50% of the variability in the financial health of Leningrad farms is explained by management quality, while another 30% is explained by farm size (farms employing more labour and more land are characterized by higher solvency).