Post-financial Crisis Period Research Articles

Corporate governance and default risk in financial firms over the post-financial crisis period: International evidence

This paper investigates the relationship between default risk and corporate governance for financial firms in 28 countries outside of North America in the post-financial crisis period, where default risk is measured by both credit default swap (CDS) spreads and estimated by a Merton-type model. Reduced default risk helps the stock market rebound during the post-crisis period. Both internal governance variables, including institutional and insider ownership, board composition and CEO power, and external regulatory factors, are examined and they show significant effect on default risk. In addition, the impacts of various governance variables are continent-specific: they have a higher impact on default risk for Asian firms than for European firms. Regulatory factors are important moderators of the governance mechanisms for banks: higher Tier 1 capital ratios reduce both CDS and fundamental default risk; recipients of secret emergency loans from the US Federal Reserve System (the Fed) exhibit lower CDS spreads post-crisis but higher fundamental default probabilities.

Bank Risk Factors and Changing Risk Exposures in the Pre- and Post-financial Crisis Periods: An Empirical Study for India

In this study, we measure and analyse the time-varying nature of risk exposures for the Indian banking industry using weekly bank-level data from 23 October 2004 to 1 August 2014. We extend the literature by studying credit, equity, interest rate and exchange rate risks following a more comprehensive framework. The study finds evidence that the risk exposures are time varying in nature and differ across banks with different characteristics. Equity risk and credit risk increase post the global financial crisis (GFC) while interest rate and exchange rate risk gets reduced. The capital market has a favourable view of small-sized, well-capitalized, well-diversified private sector banks. Furthermore, the results also show that asset size and ownership structure offer relevant information for differentiating banks regarding their riskiness. Large banks have more equity risk exposure; public sector banks have higher credit risks while private sector banks have greater interest rates and exchange rate risk exposure. The study offers valuable insights for the regulators, supervisors, policymakers, banking industry, bank managers, investors and academia. The main contribution is a better understanding of sources of banks’ risks and needs to enhance the supervisory process in the Basel framework.

Exploring the Nexus Between Human Capital, Corporate Governance and Performance: Evidence from Islamic Banks

This paper offers novel insight into the Islamic banking business model by considering the effect of investments in human capital and corporate governance features on the market performance of Islamic banks. Based on a sample of 47 banks (30 full-fledged Islamic banks and 17 Islamic Shariah-windows) operating in different regions during the 2005–2010 period, and controlling for firm-specific characteristics, this paper finds investments in human capital to have a significant positive impact on the market value in the pre- and post-financial crisis period. Based on a market measure, this paper finds board size and CEO power to have a significant positive impact, while the size of Shariah Supervisory Board (SSB) has the opposite effect on market performance. The results further reveal that the Islamic banking sector is not a homogeneous group, with full-fledged Islamic banks having lax corporate governance mechanisms and large size, while their counterparts, Islamic Shariah-windows, having strong corporate governance mechanisms tend to invest more in human capital to yield positive market value. Overall, the analysis suggests that the financial crisis may have further spurred the impact of investments in human capital on the market performance.

IMPORTANCE OF THE FUND MANAGEMENT COMPANY IN THE PERFORMANCE OF SOCIALLY RESPONSIBLE MUTUAL FUNDS

AbstractWe compare the performance of a sample of U.K.‐based socially responsible investment (SRI) funds with similar conventional funds using a matched‐pair analysis based on size, age, investment universe, and fund management company (FMC). We find that both the SRI and conventional funds outperform the market index about 50% of the time, even after fees. Subsample tests show that the SRI funds in our sample perform better in the pre‐ and postfinancial crisis periods but underperform during the financial crisis period. Importantly, we find that the FMC plays a major role in the outperformance of both SRI and conventional funds.

Küresel Finansal Krizin Muhasebe ve Değer Esaslı İşletme Performanslarına Etkisi

There are numerous studies analyzing the relationship between global financial crisis and financial performance of business. Although, recent surveys reflect the upper hand to a generally negative relationship, this question still gives rise to debate. To approach the issue from different perspective the question that whether accounting based on financial performance and value based on Economic Value-Added (EVA) play a role during periods of uncertainty? In this study, it is purposed to test this hypothesis of financial performance acting as an sample of BIST 100 listed companies, over pre and post crisis reference periods around the current financial crisis. Furthermore, this study examines the impact of cash ratio, liqudity ratio and cash conversion cycle of the recent 2008 global financial crisis on the relation between a firm’s performance and Economic Value-Added (EVA) using a sample of BIST 100 firms covering the period from 2003 to 2012. According to research findings that explanatory power of independent variables to explain dependent variables is higher in the post-financial crisis period. Moreover, EVA, which is known as a measure of modern performance in the post-crisis period, has higher explanatory power for these variables.

The value of restrictive covenants in the changing bond market dynamics before and after the financial crisis

We examine the pricing of restrictive covenants on bond issues before and after the financial crisis. The existing literature in this area uses data from the pre-crisis period. While the results of our analysis using pre-crisis data are entirely consistent with existing literature, there are dramatic differences in the value of restrictive covenants between the two periods. Further, the differences between the coefficients on the control variables document and elucidate the very different bond market dynamics before and after the crisis. Before the financial crisis, we find a statistically significant cost reduction of around 50 basis points for the inclusion of negative pledges and restrictions on sale-and-leaseback activity. In the post-financial crisis period, however, the benefit of these types of covenants evaporates, becoming statistically insignificant. The benefits, for investment grade firms, of restrictions on investment activities survives the financial crisis; the price effect in the pre-crisis period is a statistically significant 60 to 72 basis point (depending on model) reduction in yields, while in the post-crisis period it is a statistically significant 51 to 55 basis point reduction in yields. For non-investment grade firms, we find in the pre-crisis period that the price effect of restrictions on payouts and additional debt are insignificant. After the financial crisis, however, these restrictions lead to a statistically significant 141 to 150 basis point reduction in yields.

Determinants of emerging markets’ financial health: A panel data study of sovereign bond spreads

This research uses Arellano and Bover (1995) and Blundell and Bond (1998) GMM estimator to pinpoint the determinants of sovereign spreads in thirty-one emerging economies from 1994 to 2014. The empirical analysis provides evidence that GDP growth, real effective exchange rate, and political liberation play an essential role in determining the spreads. Openness and geography are surprisingly not significant drivers of a country’s riskiness. In addition, the estimates show a considerable impact of the 1997–1998 Asian Crisis and the 2008–2009 Financial Crisis on emerging countries’ spreads. However, there was no significant increase in bond spreads in the post-Financial Crisis period.

CEO compensation and banks’ risk-taking during pre and post financial crisis periods

This study examines the impact of CEO compensation on banks’ risk during both pre and post-financial crisis periods. Our results suggest a negative relationship between CEO bonuses and banks’ risk in the pre-financial crisis period. Similarly, restricted shares and options granted to CEOs in the post-financial crisis period also appear to decrease banks’ risk. In contrast, we observe a positive influence of the Troubled Asset Relief Program (TARP) on banks’ risk. Our results also show that the length of time to maturity of options influences banks’ risk-taking behavior. Our findings have useful implications for formulating and regulating CEO compensation structure.

The impact of EMU on bond yield convergence: Evidence from a time-varying dynamic factor model

This paper examines the dynamics of long term sovereign bond yields for 21 OECD countries. Following Del Negro and Otrok (2008), we estimate a dynamic factor model, with time varying parameters and stochastic volatility, that decomposes the observed variation in bond yields for each country into a common factor, a regional factor (EMU/non-EMU), and an idiosyncratic country specific factor. We find that prior to the financial crisis of 2008, the common factor played a dominant role for most countries in our sample. In the post financial crisis period there is substantial heterogeneity in the relative importance of the EMU and the idiosyncratic factors across different countries. For instance, our results suggest that there was a decoupling between the EMU and bond markets of the periphery economies of Greece, Ireland and Portugal in the post-2008 period. We find that after the onset of sovereign debt crises in these economies, the idiosyncratic factor assumed an important role in driving the bond yield variation. Thereafter, the EMU’s share in bond yield changes in Ireland and Portugal increased considerably since 2012, whereas for Greece the idiosyncratic factor continued to play a significant role in driving bond yields. In contrast, the EMU factor consistently played a dominant role in explaining bond yield changes in Italy and Spain, the other two economies that also experienced severe debt crisis during this period. We argue such differences in the importance of the EMU factor between core and periphery economies can be attributed to the systemic importance of core members for the EMU. This is indicated by our finding that bond yields and credit default swap (CDS) are less sensitive to changes in debt-GDP ratios in countries where the EMU factor played a larger role in the post-2008 period.

What Drives a Firm's ES Performance? Evidence from Stock Returns

This study empirically explores the dynamic relation between the environmental and social (ES) performance of a firm and its stock market returns. We find robust evidence that worse stock market performance increases firms’ efforts on ES activities. Specifically, firms are more likely to improve their product and diversity performance and enhance their ES strengths rather than reduce ES concerns after poor stock market performance. This finding that poor stock market performance precedes enhanced ES performance is present (i) in firms with more financial slack, (ii) in firms with higher customer awareness, (iii) during the post-financial crisis period, and (iv) when a firm’s shareholder activism on ES issues is intense. Our results underscore the importance of stock market performance in corporate ES decisions.

The Impact of Liquidity on GARCH Option Pricing Error during Financial Crisis

In this paper, we explore the valuation performance of Heston and Nandi GARCH (HN GARCH) model on the pricing of options of financial stocks listed for AMEX during pre and post financial crisis periods. We find that the GARCH pricing model presents better performance than the traditional Black-Scholes model for the out-of-sample option pricing, no matter what the moneyness and the time-to-maturity. Specifically, the models show the effects of liquidity is not significant. Intuitionally, smaller liquidity tends to exhibit more pricing errors, especially for longer mature options. Unfortunately, we cannot get the expected outcomes, which is that the period of post financial crisis tend to have larger pricing errors. In sum, except more computational convenience, the HN GARCH model offers another vision of the relationship between liquidity and its effect on pricing errors.

Post Financial Crisis and Macroeconomic Fundamentals on Household Debt in Advanced Economies

Objective - The unwarranted household debt initiated the global financial crisis which led to severe worldwide financial instability. Deleveraging process which has been taking place since the crisis has been slow and there is no quick fix to the debt issue. The lack of study on the effect of financial crisis on household debt justifies the objective to investigate macroeconomic fundamentals and financial crisis on household debt. Methodology/Technique - This study applies panel data analysis in ten advanced economies from 2001 to 2013. The random effect (RE) generalized least square estimator is used in the regression to examine macroeconomic factors and post financial crisis period as control variable on household debt. Findings - Findings confirm that post financial crisis period has significant negative effect on household debt which affirmed the deleveraging process in most advanced economies. Economic growth and household disposable income too have negative relation with household debt. Nonetheless, macroeconomic factors such as inflation, housing price and household consumption encourage household debt in advanced economies. Novelty - This study suggests that empirical evidence support that household avert from borrowing post financial crisis. Intensification of housing price and other consumption expenditure, if left unrestrained, may elicit another debt crisis. These are challenges faced by policy makers to curb household debt which entail risks for households, the financial system and the wider economy. Type of Paper: Empirical Keywords: Household Debt; Post Financial Crisis; Macroeconomic Factors. JEL Classification: G01, G02.

Calendar Anomalies:Before and After the Global Financial Crisis in Emerging BRIC Stock Markets

The legal and operational changes in the capital market operation of BRIC nations and availability of information at low cost and some time with no cost influenced the efficiency of capital market in the recent past. In order to identify the calendar anomalies, the present study examine the day of the week effect in the developing stock market of BRIC. The study period has been classified into three sub-periods as pre-financial crisis period (i.e., 1st January 2000 to 31st December 2007), during the financial crisis (1st January 2008 to 31st December 2009) and post financial crisis period (1st January 2010 to 31st December 2016). The dummy variable regression result evidenced that after the financial crisis period BRIC capital markets reached the efficient stage where day of the week trading rules lose the ground to earn the abnormal return. This can be attributed to recent changes in the capital market regulations and strict vigilance of the stock market watch dogs in these countries.

Assessing the Influence of Firm and Macroeconomic Variables on Corporate Profitability in India

Corporate profitability not only shows the firm's ability to generate revenue but also strongly communicate the health of the industrial sector of any country. The aim of this research was to provide realistic evidence about the factors motivating corporate profitability in India. Firm specific variables comprised of liquidity ratio, leverage ratio, firm size, and export intensity of selected firms. Among the macroeconomic variables, we included gross domestic product, wholesale price index, USD - INR exchange rate, and current account balance of India. To enable studying the varying relationship between the selected exogenous factors and corporate profitability, we segregated this study into three phases, that is, full period (2000 to 2015), prior to the global financial crisis period (2000 to 2007), and post global financial crisis period (2009 to 2015). We employed panel regression's fixed effect model and random effect model to determine the influence of these variables on firm's profitability. The outcome of the research indicated that leverage ratio had a significant negative relationship in both full period and pre-crisis period, while liquidity ratio and export intensity had a positive impact during the full study period. None of the macroeconomic factors solely affected the profitability of the firms. The study also revealed that no single variable used in the study affected corporate profit during the post-crisis period. Thus, beckoning corporate profitability depended upon a combination of various internal and external information.

Can Investors Hedge Energy Risk? Evidence from Asia

The relationship between energy and stock prices is investigated in the context of Asia, including China and Japan. Oil, gas and coal prices are considered both individually and in an energy portfolio. Consistent with evidence from analysis of other asset prices in international markets, during the post Global Financial Crisis (GFC) period, Asian stock markets moved in tandem with oil prices. However, using asset pricing and portfolio theory we identify time-varying integration between individual stock markets and the energy portfolio, which in turn may limit the benefit of risk reduction through diversification. However, this relation can also be used to hedge the common factor arising from energy risk. Doing so provides benefits to investors in the form of positive risk adjusted returns, although these are episodic.

The impacts of financial regulations: solvency and liquidity in the post-crisis period

PurposeBasel III and the capital stress testing introduced new requirements and new definitions while retaining the structure of the pre-2010 requirements. The total number of requirements increased, making it difficult to determine which and how many constraints are binding. The purpose of this paper is to discuss the new financial regulations in the post-financial crisis period, focusing on the capital and liquidity regulations.Design/methodology/approachThe authors explore the impact of financial regulations using various data sources – financial and accounting data from Y-9C Reports. Market data such as daily bond trading from TRACE through the Wharton Data Research Services and Treasury yield from the Bloomberg. The authors use regression analysis to examine the roles of capital adequacy and liquidity regulations.FindingsThe authors’ analysis in this paper suggest that Basel III, CET1 and Level 1 HQLAs requirements post-financial crisis have reshaped the balance sheets of large financial institutions, with some differential impacts on traditional versus capital markets banks. These changes appear to respond to the binding constraints (CET1 being a preponderance of required regulatory capital, Level 1 HQLAs a majority of required HQLAs and the expense of both) created by these new requirements, which also appear to have constrained asset growth at such institutions. Consistent with the authors’ view, their results suggest that the new requirements are less constraining for large traditional banks (such institutions show a rapid increase in CET1 capital to steady-state levels by 2012 and strong retail deposit rebuilding resulting in a relatively low required HQLA) and much more so, particularly the liquidity requirement, for the capital markets banks (such institutions show continuous building of CET1 capital over the post-crisis observation period, declines in the share of trading assets and increases in the share of HQLAs combined with efforts to increase retail deposits). Credit risk spreads rose dramatically during the financial crisis of 2008-2009. Although decreased, they remain higher and with greater dispersion (for both groups of banks) than pre-crisis. Preliminary regression analysis suggests that the market responds to changes in measured liquidity, rather than the regulatory capital ratios, when pricing bank risk (as reflected on bond spreads).Research limitations/implicationsThe estimation is based on historical relationship in the data. We must be cautious in extrapolating the results in a different environment.Practical implicationsThere appears to be an arbitrage between HQLA and retail deposits. Capital markets banks and traditional banks follow different business models as evident in the analysis in this paper.Social implicationsMarket pricing suggests that the liquidity measures are more transparent and easier to understand. Capital ratios are not as easy to interpret.Originality/valueOriginal research. To the authors’ knowledge, there is no paper that examines impacts of capital and liquidity regulations after the crisis at capital markets banks vs traditional banks – using both accounting data and market data.

Firm Performance: A Reflection of Risk Management Practices and Artificial Intelligence

The relationship between a firm’s risk management practices and the performance and profitability of the firm is assessed, as well as the impact of artificial intelligence on financial risk management and how that further affects firm performance. The article examines risk controlling practices post-financial crisis period to determine if the financial event was a deciding factor in most firm’s implementation of increased managerial practices towards risk. It was found that risk management, as accounted for in a firm’s capital structure, significantly affects profitability, if the firm is a financial institution. Non-financial institutions can apply effective risk management techniques through other firm operating activities and applying targeted financial instruments.

Evaluating the Effectiveness of Asset Pricing Model before, during and after Financial Crisis 2008: Evidence from Karachi Stock Exchange

The Study aims to explore the strength of arbitrage pricing model (APT) for determining stock returns of Karachi stock exchange (KSE) across three distinct and structured periods; before financial crisis period (2006-07), during financial crisis period (2008) and after financial crisis period (2009-10). The Study adopted descriptive statistics, Pearson correlation, linear regression, Random effect model for interpretation and execution of data. 253 financial and non-financial listed companies on KSE for the period of (2006-10) are considered as sample firms. Results of regression analysis indicated that models selected for the present study showed poor performance for measuring KSE returns. Independent variables showed significant behavior for measuring KSE returns in pre-financial crisis period; no statistical relationship for measuring KSE returns in during financial crisis period; insignificant nature for measuring KSE returns the post-financial crisis period. The Study has provided understandings about arbitrage theory applicability and financial crisis - 2008 impacts on KSE.

Discretionary provisioning practices among Western European banks

PurposeThe purpose of the study is to investigate whether discretionary ‘loan loss provisioning’ by Western European banks is driven by income smoothing or credit risk considerations.Design/methodology/approachTo test the income smoothing hypothesis, the study uses ordinary least square regression to examine the relation between loan loss provisions and earnings before tax and loan loss provisions in the post-financial crisis period.FindingsThe authors find evidence that discretionary provisioning by Western European banks is driven by income smoothing incentives in the post-financial crisis period, particularly, among listed banks. Also, it is observed that discretionary provisioning is significantly influenced by credit risk factors, mainly, non-performing loans and loan growth. Also, it is found that discretionary provisioning by Western European banks is procyclical with fluctuations in the economic cycle. Overall, the implication of the findings is that discretionary provisioning among Western European banks is driven by both income smoothing and credit risk considerations.Originality/valueThis study focus on banks in Western Europe in contrast to prior European studies.

The Effect of Good Corporate Governance and Premium Growth on the Performance of Insurance Companies

Objective - Insurance companies in Indonesia are considered an important part of society by the Indonesian government. Corporate governance was a major problem during the post-financial crisis period, particularly in emerging markets in Indonesia. Financial Institutions considered the possibility of increasing insurance premiums to cover their operating costs and increase their profits. The purpose of this study is to measure the effect of corporate governance and premium growth on the performance of the insurance sector, to determine the characteristics of good corporate governance. Methodology/Technique - The samples used in this study include insurance companies listed on the Indonesia Stock Exchange between 2011 and 2015. The data used in the study is derived from the Indonesian Stock Exchange Corner. The method of analysis used is descriptive statistics and linear regression. The research objectives are to analyze the influence of the independent variables on the dependent variable. A purposive sampling method is used to determine the sample size of the study. This method generated a sample of 9 commercial insurance companies. Findings - The findings show that corporate governance is significantly and positively related to ROA whereas Insurance Premiums are not significantly related to ROA. Novelty - Study suggests that the insurance companies must aim to improve corporate governance structures by finding solutions to existing problems and improving the management structures of the company, in order to attract future investment which will ultimately lead to an increase in ROA and ROE. Type of Paper: Empirical Keywords: Corporate Governance; Insurance Premium; Corporate Performance; Growth. JEL Classification: G22, L25, M41