Percent Of Total Assets Research Articles

Bad Loans and Resource Allocation in Crisis Years: Evidence from European Banks

The aim of this study is to explore the relation between loan portfolio quality and lending in European banks over 2005-2014. We focus on lending behavior of banks from distressed countries since the Euro sovereign debt crisis. Our results confirm the existence of a negative nexus between poor loan quality and lending, since a higher NPL ratio explains a reduced loan growth and a lower allocation to loans at the advantage of government debt (as a percentage of total assets). Such an impact on lending and reallocation effect are strong and consistent across specifications and over and above other factors that may affect credit supply.

Importance of Judicial Efficiency in Capital Structure Decisions of Small Firms: Evidence from Pakistan

Empirical evidence to identify factors that are responsible for the sluggish development of bond and capital markets in Pakistan remains scanty. This paper is a step forward in this direction. Specifically, this paper draws on the recent developments in the area of law and finance to formulate several propositions on how judicial efficiency can have a differential impact on corporate capital structures of small and large firms. These propositions are tested using data of 370 firms listed at the Karachi Stock Exchange (KSE) and 27 districts high courts of Pakistan. The results indicate that leverage ratio decreases, when judicial efficiency decreases; however, this relationship is not statistically significant. This is due to the composition effect. Allowing judicial efficiency to interact with the included explanatory variables, the results show that worsening judicial efficiency increases leverage ratios of large firms and decreases leverage ratios of small firms, which is an indication of the fact that creditors shift credit away from small firms to large firms in the presence of inefficient judicial system. Results also indicate that the effect of inefficient courts is greater on leverage ratios of firms that have fewer tangible assets as percentage of total assets than on leverage ratios of firms that have more tangible assets. The results indicate that under inefficient judicial system creditors reduce their lending to small firms and firms with little collateral and redistribute the credit to large firms. This is why judicial inefficiency does not change volume of credit, but changes distribution of the credit. These results highlight the importance of judicial efficiency for small firms in the determination of their capital structures. JEL Classification: G10, G21, G32 Keywords: Judicial Efficiency, Leverage, KSE, Capital Market Development, Law and Finance.

Implications of a TAF program stigma for lenders: the case of publicly traded banks versus privately held banks

Term auction facility (TAF) was created during the financial crisis as a substitute for the Federal Reserve’s discount window, the lender of last resort. We hypothesize if TAF borrowing is viewed as a bailout then publicly traded banks would borrow relatively fewer TAF funds to avoid a bailout stigma. We find publicly traded banks did borrow less (as a percent of total assets) in the TAF program than privately held banks. Further, too-big-to-fail banks and investment banks borrowed relatively less than other publicly traded banks indicating greater levels of public scrutiny reduces borrowing under emergency government liquidity programs. We also find that publicly traded banks pledged lower quality and less liquid collateral than private banks when borrowing under the program. Our results suggest TAF provided more benefit to traditional privately held banks with strong balance sheets that were able to borrow relatively greater amounts in anticipation of either future liquidity needs as suggested by Ivashina and Scharfstein (J Financ Econ 97:319–338, 2010) or increased lending as found by Berger et al. (The Federal Reserve’s discount window and TAF programs: “pushing on a string?” Working paper, University of South Carolina, 2014).

An Empirical Analysis of Real Estate Lending and Bank Failures: 1863-2012

As demonstrated during the financial crisis of 2007-8 and several other times throughout history, bank failures can pose a threat to financial system stability and broader economic growth. The importance of real estate lending to banks’ financial viability and the relationship between real estate price swings and specific financial crises throughout American history has been amply demonstrated. In this paper we examine the historical relationship between banks’ real estate portfolios and subsequent bank failures using a novel, long-term dataset ranging from 1863 to 2012. We examine banks’ real estate loans, banks’ total assets and bank failures to test for a relationship between banks’ real estate lending and subsequent bank failures. Using the methodology of Pesaran and Shin (1999) and Pesaran et al. (2001), we conduct an Autoregressive Distributed Lag (ADL) “bounds test” to test for a long-run relationship between real estate loans and bank failures. We find evidence of a relationship between banks’ real estate loans as a percentage of total assets and failures in subsequent years.

Bank Opacity and Crash Risk

Banks are considered more opaque than non-bank firms because bank loans are privately negotiated between a bank and its customers. Information about the creditworthiness of the customers and the terms of the contracts are generally not available to outside investors. In addition, the trading assets of banks are intrinsically difficult to value given their complexity. Although it is required that a bank reports its trading assets periodically, it is difficult to impossible to determine how trading assets change between two reporting dates. Furthermore, bank managers have as strong a motivation to conceal negative news as their non-bank counterparts do. When the upper limit on how much negative news can be accumulated is reached, all negative news will be uncovered all at once, possibly leading to a stock price crash. We examine how bank assets opacity affects bank crash risk, using loans and trading assets (both measured as a percentage of total assets) as proxies for opacity. We find that opacity of assets is positively related to bank crash risk. In addition, we look at how CEO compensation affects bank crash risk since equity-based pay is blamed for motivating CEOs to engage in opportunistic behaviors such as news hoarding. However, we do not find evidence supporting the view that CEO equity-based pay is associated with higher crash risk. Our results are robust to different specifications and measures of crash risk.

Benefits and Costs of Higher Capital Requirements for Banks

This study provides new estimates of the likely economic losses from banking crises. It also provides new estimates of the economic cost of increasing bank capital requirements, based on the author’s earlier estimate (Cline 2015) of the empirical magnitude of the Modigliani-Miller effect in which higher capital reduces unit cost of equity capital. The study applies previous official estimates (BCBS 2010a) of the impact of higher capital on the probability of banking crises to derive a benefits curve for additional capital, which is highly nonlinear. The benefit and cost curves are examined to identify the socially optimal level of bank capital. This optimum is estimated at about 7 percent of total assets, with a more cautious alternative (75th percentile) at about 8 percent, corresponding to about 12 and 14 percent of riskweighted assets, respectively. These levels are, respectively, about one-fourth to one-half higher than the Basel III capital requirements for the large global systemically important banks (G-SIBs).

A Talmudic Bankruptcy Solution: The CCC Principle

Following a bankruptcy, how should we distribute the available assets among the eligible creditors? Most people would accept a proportional distribution — for each claimant, calculate her percentage of the sum of all claims and assign her that same percentage of total assets. However, this is not the only reasonable approach. For example, if every claim is at least as large as total assets, assigning an equal share to every creditor is a sensible solution. Three numerical bankruptcy examples for three claimants, discussed 2,000 years ago in the Talmud, coincide with the above two approaches, but the third case remained a puzzle until recently when modern game theory (Aumann and Maschler, 1985) was enlisted to demystify all cases. This paper explains the unifying principle, the Contested-Claim Consistency principle (CCC, or CG-Consistent principle), behind the Talmudic examples. Importantly, it uses different means to better understand the logic behind the CCC bankruptcy allocations and points out the subtle yet important properties behind them. This study aims to clarify the meaning of fairness underlying the CCC allocation, and proposes that CCC may better convey the meaning of the pari passu provision that appears in many International Sovereign Debt Instruments.

Drivers of technical efficiency inMalaysian banking: a new empirical insight

Restructuring and rationalisation ofMalaysian banking in 2000 and the subsequent policy of deregulation and liberalisation adopted byBankNegaraMalaysia (BNM) have resulted in a significant transformation ofMalaysian banking.Banks are now poised to play a pivotal role in the economic transformation of the economy as envisaged in theFinancialSectorBluePrint 2011–20 ofBNM. Using the data envelopment analysis technique, the technical efficiency of 19 commercial banks (8 domestic banks and 11 foreign banks) operating inMalaysia during 2005–12 is evaluated. Then, using bootstrap‐corrected efficiency scores, the drivers of bank efficiency were estimated using the Tobit regression approach. Results clearly show that three large domestic banks are not only more efficient than their counterparts, but are also more efficient than the foreign banks.Bank size and return on assets are found to be the significant drivers of technical efficiency ofMalaysian banks. Capital adequacy and the advances to deposit ratio also have a role in driving technical efficiency. The results also indicate that banks that are more effective in managing credit risk, as reflected in a lower level of non‐performing assets as a percentage of total assets, and have lower levels of personnel expenses to total assets, are more efficient. The findings have significant implications at the individual bank level and also at the policy level.

Do changes in credit ratings of REITs affect their capital structure decisions?

Existing research has highlighted the high leverage ratio of Real Estate Investment Trusts (REITs). To the extent that credit rating is important to REITs when sourcing for capital from the public debt markets, our paper investigates the effect of changes in REIT credit ratings on capital structure decisions while controlling for endogeneity effects. Our results indicate that REITs that face the prospect of an imminent credit rating downgrade issue approximately 11% less debt net of equity as a percentage of total assets than other REITs. This effect is asymmetric in that positive rating outlooks do not have a significant impact on REIT capital structure activities.

Reforms, Ownership and Determinants of Efficiency: An Empirical Study of Commercial Banks in India

Major steps were taken in Indian banking sector in the early 1990s to liberalise commercial bank functioning in order to improve their efficiency. The measurement of bank efficiency provides the foundation for consequent inquiry into reasons producing efficiency differences. This article measures technical efficiency of balanced panel of 54 commercial banks operating in India during 1991–92 to 2006–07 using Data Envelopment Analysis (DEA) with an aim to study effects of reforms and ownership on bank efficiency. Since existing literature lacks uniformity in methodology used for identifying determinants of efficiency in banking, this study employs a blend of tests including profitability analysis (suggested by Spong et al., 1995 ) and found evidence that financial reform, ownership and listing of bank shares have influenced bank efficiency in India. However, no conclusive evidence was found regarding a relationship between size and efficiency. In addition, ‘most’ efficient banks were found to be characterised by higher Net Profit as percentage of Total Assets (NPTA) and higher Profits per Employee (PPE) while ‘least’ efficient banks reported higher levels of Non-Performing Assets (NPAs). JEL Classification: G21, G32

Bank Liquidity, Market Participation, and Economic Growth

We report evidence that bank liquidity ratios (liquid assets as a percentage of total assets) decrease during the process of economic development. To reconcile this observation with the increasing importance of financial markets and the increasing direct participation of individual investors in them, we build a neoclassical growth model with banks and markets. In this environment, banks engage in cross-subsidization of the impatient depositors to keep up with the competitive pressure from the markets. Moreover, as the economy grows, it becomes easier for the individuals to access the market, and the banks react to this by lowering their liquidity ratios. In a panel of 45 countries, we find evidence that such a mechanism is into place: a one-unit increase in an index of securities market liberalization leads to a drop in the bank liquidity ratio between 15 and 22 per cent.

High Yield: Strategic Allocation

We argue that most investment funds would benefit by setting a dedicated strategic allocation to high yield bonds, and we discuss how much of a fund’s assets should be so allocated. Meketa Investment Group therefore recommends that most diversified long-term funds consider allocating between five and ten percent of total assets to high yield bonds. We begin by providing background information on high yield bonds. We then proceed to discuss the three major risks inherent in high yield bonds: liquidity risk, default risk, and interest rate risk. In the following section, we analyze the return behavior of high yield bonds, including the characteristics of expected return, volatility, and correlation with other asset classes. We then proceed to evaluate the case for high yield bonds by comparing their use in a strategic and tactical context. The last section deals with issues an investor would face once the decision has been made to invest in high yield bonds. We conclude with a brief summary.

Islamic Investing Goes Mainstream: A SWOT Analysis

Islamic finance is a fast growing segment of the global financial industry, with Islamic assets recently estimated to be about USD 1 trillion. This article reviews the asset management sector of the industry with a focus on Islamic mutual funds. Islamic investments are well positioned and have been steadily increasing their presence and gaining a larger market share globally. This is due mainly to surplus liquidity in some oil and gas-rich Muslim countries as well as rising religious awakening among Muslims worldwide, which has attracted the attention of many western financial institutions. At about USD 60 billion, the Islamic mutual fund industry represents 6 percent of total assets in the Islamic finance industry, with a potential growth to $500 billion. A review of the main types of Islamic investment funds is followed by a SWOT analysis and recommendations for future progress. <b>TOPICS:</b>ESG investing, mutual fund performance, global

Predicting Auditor Changes With Financial Distress Variables: Discriminant Analysis And Problems With Data Mining Approaches

Our study extends previous research that uses financial distress factors in predicting auditor changes by evaluating the effectiveness of the traditional discriminant analysis model, not used in previous auditor change studies, and by highlighting the importance of evaluating the likelihood that data mining approach classification results occurred by chance. Significance of individual predictor variables, as well as of the full set of 13 financial variables, can be tested using discriminant analysis. Kwak et al. (2011) document overall classification accuracy rates ranging from 61 to 63.5 percent for the four data mining models they compared but did not address whether these rates occurred by chance. Using Kwak et al.s (2011) data set of firms changing auditors in 2007 or 2008 and matching non-auditor change firms, our discriminant analysis test results show overall accuracy rates of less than 56 percent and true positive rates over 85 percent, but these rates are influenced by a disproportionate number of non-auditor change firms being classified as auditor change firms. Individual predictor variables that are important in the discriminant equation based on standardized canonical coefficients include losses (LOSS) and no payment of dividends (DIV) in the year prior to the auditor change, retained earnings as a percent of total assets (RE/TA), and earnings before interest and taxes as a percent of total assets (EBIT/TA). The Kappa statistic and AUC metrics for all 13 data mining algorithms we used indicate that classifications using these algorithms are no better than random classifications.

The Relevance of External Credit Ratings in the Capital Structure Decision-Making Process

This paper empirically examines the relevance of external credit ratings in the capital structure decision-making process with regard to an international firm sample. Using the rating outlook to measure the imminence of a rating change, allows us to test managers’ ex-ante capital structure behavior more concisely than prior studies have. The results show that companies near a rating change issue 1.8% less net debt relative to net equity as a percentage of total assets than firms not near a rating change. We find that the effect is economically larger for US firms and also if access to the commercial paper market is at risk.

Deferred Taxes Revisited

&lt;p class="MsoBlockText" style="line-height: normal; margin: 0in 0.5in 0pt;"&gt;&lt;span style="font-size: 10pt; mso-bidi-font-style: italic;"&gt;&lt;span style="font-family: Times New Roman;"&gt;The study examines the deferred tax accounting theory and procedures required by the FASB in the context of the unit problem. The unit problem involves the selection of the appropriate perspective (either individual or aggregate) for applying measurement and recognition conventions to phenomena of interest. From an individual event perspective, the FASB's conclusions regarding liability recognition are inconsistent with the definition of liabilities found in the Statement of Financial Accounting Concepts No. 6. In addition, the use of inconsistent perspectives by S109 creates disagreements with the FASB&amp;rsquo;s position, where both the individual and aggregate perspectives are used simultaneously as the basis of the FASB's decisions. The study argues that the income tax accounting issue should be viewed from an aggregate perspective and concludes that the flow-through method of accounting for income taxes should be adopted. The impact of eliminating deferred taxes and adjusting the liability and stockholders equity balances on the debt-to-equity (DTE) ratio is computed for the entire COMPUSTAT database (20 years). For the 817 firms that persist throughout the 20-year period, each year, the net deferred tax balance for each company is compared to the balance in the previous year, with increases (53%) outnumbering decreases (32%), and the remainder (15%) showing no change. In addition, the average annual net deferred tax balances of entire sample show increases for the 15 of the 20 years examined and the balances for persisting firms show increases for 17 of the 20 years examined. Finally, the relative size of the net deferred tax balances as a percentage of total assets and total liabilities for both the overall sample and the persisting firms range from 4.1% to 5.8% of total assets and from 7.9% to 11.8% of total liabilities. Statistical results show that the decreases in the DTE ratio are significant for each year, with an overall average decrease of 19%. Thus, the flow-through method results in significant changes in a key ratio that is used in the financial evaluation of most companies. Conversely, the DTE ratios currently used in the financial evaluation of companies are flawed because the net deferred tax balances are included in liabilities, when it is clear that these accounts do not meet the liability criteria specified in accounting theory.&lt;/span&gt;&lt;/span&gt;&lt;/p&gt;

Operational Efficency of Indian Banking Industry: An Inter Sectoral Analysis

The present study has been attempted to make the analysis and comparison of the operational efficiency of Indian banking industry. The present has study based on a set of four variables. First is net profit as percentage of total assets, second is Operating profit as percentage of total assets, third is Net NPA's as percentage of net advances and last is CRAR as percentage of total assets. For this purpose we has use parametric and non parametric. Both test indicate that there are significant difference in the operational efficiency of Indian banking industry. The operational efficiency of foreign banks is batter than public and private banks.

Reporting Bias and Economic Shocks

We propose a parsimonious stochastic model of reported earnings that links misreporting to performance shocks. Our main analytical prediction is that misreporting leads to a negative second-order autocorrelation in the residuals from a regression of current earnings on lagged earnings. We also propose a stylized dynamic model of earnings manipulation and demonstrate that both earnings smoothing and target-beating considerations result in the same predictions of negative second-order autocorrelations. Empirically, we find that the distribution of this measure is asymmetric around zero with 27 percent of the firms having significantly negative estimates. Using this measure, we specify a methodology to estimate the intensity of misreporting and to create estimates of unmanipulated earnings. Our estimates of unmanipulated earnings are more correlated with contemporaneous returns and have higher volatility than reported earnings. With respect to economic magnitude, we find that, in absolute terms, median misreporting is 0.7 percent of total assets. Moreover, firms in our sample subject to SEC AAERs have significantly higher estimates of manipulation intensity.

Does ownership form in community banking impact profitability?

PurposeThe purpose of this paper is to examine the profitability of different ownership forms of banks. The two ownership forms are corporations that elect to be taxed as a Subchapter S corporation (limited to 100 shareholders) as opposed to those corporations that do not make this election. The impact this election has on the dividends paid to the investors is examined.Design/methodology/approachThis paper uses Call Report Data on Wisconsin banks as collected by SNL Securities as its database. The research methodology uses two measures of performance: dividend ratio and accounting return on assets (ROA). The dividend ratio is defined as dividends as a percentage of net income (dividends/net income). Accounting return on investment is net income as a percentage of total assets (net income/total assets) and is a measure of profitability. A number of regressions were created with these as the endogenenous variables and a heteroskedasticity‐corrected ordinary least squares (OLS) model was used.FindingsSubchapter S banks were found to be more profitable (as measured by ROA). However, when taxes are taken into account, there is no practical difference in profitability between the two types of corporate structure.Research limitations/implicationsBy limiting the analysis to Wisconsin, a single state, confusion that may be caused by both state laws (personal and corporate) and local corporate cultures is avoided.Practical implicationsThe practical implications of this research can guide the federal government in determining whether this form of stock ownership is a device that reduces or increases federal tax revenues. It can also provide insight to the stockholders of these banks into the differences in profitability these corporate forms offer.Originality/valueWhile earlier literature has reviewed the concept of Subchapter S corporations and its theoretical impact, little research has been conducted that tests the actual results. Due to the private nature of the corporate form (these types of corporations are often not publicly traded and have no incentive to reveal private financial records), this original research is the result of the public nature of banks that provide a rich dataset for us to examine.

The Implications of Hedge Fund Activism on the Target Firm’s Existing Bondholders

In contrast to previous studies documenting positive abnormal returns to target shareholders, we find that hedge fund activism significantly reduces existing bondholders’ wealth. Bondholders earn an average excess bond return of -3.9% around the initial 13D filing date, and an additional average excess bond return of -6.4% over the remaining year after the filing date. When examining the reasons behind these results, we find that negative excess bond returns are related to a subsequent decline in cash on hand (loss of collateral effects) and an increase in total debt as a percentage of total assets. In addition, negative bond returns are more prominent when the hedge fund activist conducts a confrontational campaign against the target firm or if the activist gains at least one seat on the target’s board within a year of the initial 13D filing. We also find evidence of an expropriation of wealth from the bondholder to the shareholder. We conclude that the intervention of the activist results in the firm taking actions that are deleterious to bondholder wealth.