Post-financial Crisis Period Research Articles

FINANCIAL TURBULENCE AND RECOVERY IN STOCK MARKETS AMONG INDIA AND ITS MAJOR ASIA-PACIFIC COUNTERPARTS: AN ANALYTICAL STUDY DURING THE GLOBAL FINANCIAL CRISIS PERIOD AND POST-FINANCIAL CRISIS PERIOD

Understanding stock market correlations is essential for gauging financial integration, identifying risk diversification potential, and supporting investment management especially during economic downturns in a globally connected landscape. This paper presents a comprehensive correlation analysis among India (S&P BSE SENSEX) and ten prominent Asia-Pacific countries— China (SSE Composite), Israel (TA-125), Japan (Nikkei), Hong Kong (Hang Seng), Taiwan (TSEC), Indonesia (Jakarta Composite), South Korea (KOSPI), Australia (S&P/ASX 00), Singapore (FTSE), and Russia (MOEX Russia)—across two pivotal phases: the global financial crisis period, spanning from August 7, 2007, to April 16, 2009 and post-financial crisis period, from April 20, 2009, to December 30, 2019. Using a combination of descriptive statistics and correlation analysis on the calculated returns from daily adjusted market closing series of these indices, the study assesses the degree of association among the indices of India and the ten economies, with normality diagnostics guiding the selection of the appropriate correlation methodology. The normality tests indicate that none of the return series follow normal distribution and validate the use of the non-parametric Spearman Rank Correlation method. Results reveal persistently weak correlations among the S&P BSE SENSEX and other indices, suggesting scope for minimal co-movement across the indices in both periods. Although correlation among returns from Indian and ten Asia-Pacific indices grew from the crisis to the post-crisis period, no strong association emerged, showing only modest inter-market linkages in both intervals.

Empirical Evidences Regarding Okun's Law in the Central and Eastern Europe in the Post – Financial Crisis Period

Abstract Numerous studies have been conducted based on Okun’s Law (1962), researchers proposing various approaches, while the two most common are the difference approach, which reflects the link between the variation of unemployment rate and the output growth, and the gap approach, which shows the relationship between the deviation of the actual unemployment rate from the natural unemployment rate and the Gross Domestic Product (GDP) gap. In order to see how the relationship looks like over time and how the Okun’s coefficient varies from country to country, this study analyzes the sensitivity of unemployment at output changes while carries out a comparative analysis for Central and Eastern Europe (CEE) countries, regarding Okun's Law applicability in the post-financial crisis period, taking into consideration previous relevant researches. Therefore, the assessment is based on quarterly data, between 2010 and 2019, for unemployment and economic growth, recorded in five CEE countries, members of the Organization for Economic Co-operation and Development (OECD): Bulgaria, Czech Republic, Hungary, Poland and Romania. While the research is based both on the gap and difference method, it may lead to results sensitive to the method chosen in order to assess the unobservable variables, namely potential output and natural unemployment rate. In order to determine the structural components of the GDP and unemployment rate, it is used the Hodrick-Prescott univariate filter, applied on quarterly data. Before estimating the Okun's coefficient, the study also examines the causality relationship between unemployment and GDP using Granger causality test.

Analysing the Impact of Major Financial Crisis on Macroeconomic Variables and Stock Prices: An Empirical Study of Stock Market of United Kingdom

The research paper empirically tests the impact of major financial crisis of 2008 by testing the causality between five macroeconomic variables (interest rate, inflation, money supply, GDP and exchange rate), the FTSE All-Share index and its sectoral indices. Furthermore, it analyses whether the global financial crisis of 2008 affected the direction of the causality or not. For this purpose the causality tests were performed in two sections one on the data for the pre financial crisis period from 1999 to 2007 and another on the data for post financial crisis period from 2008 to 2022. The causality was tested using the quantile Granger causality test, the research findings reveal the complex causality between the UK stock market and the most prevalent macroeconomic factors. The findings of the research are suggestive that the causality between macroeconomic factors changed from pre-crisis period to post-crisis period. This is indicative of the event sensitivity of the stock market of UK. It was found that the direction of this causality varies according to the circumstances of the economy and across different sectors involved, and particular economic conditions at various times. The findings of this research provide important insights for policymakers, investors, and economic analysts, as they shed light on the dynamic and complex relationship between the indicators, both on an aggregate and sectoral level. The research findings also emphasise the importance of considering the variables' distribution when analysing the issue of causality.

The audit of banks in the USA: Has it changed since the financial crisis?

The most recent financial crisis exposed to the auditors the risk associated with the audit engagement of their banking clients. Because many banking clients failed and investors suffered trillions of dollars in losses, auditors are now defendants in numerous shareholder and regulatory lawsuits. There is consensus that the financial crisis was created by an abundance of credit, excessive risk taking through complex financial instruments, weak corporate structures, and ineffective regulatory mechanisms. In this study, we examine how the financial crisis has affected the audit engagements of banking clients. We examine audit fees, audit report lag, and auditor changes before and after the financial crisis with respect to specific bank risks like credit risk, interest rate risk, and liquidity. Overall, we find that auditors are more responsive to bank risks in the post-financial crisis period compared to the pre-financial crisis period.

GREEN TOTAL FACTOR PRODUCTIVITY MISMEASUREMENT WITHOUT CONSIDERING INTANGIBLES: EVIDENCE FROM CHINA

This paper aims to re-estimate green total factor productivity (GTFP) with the consideration of intangible capital in Chinese provinces between 2003 and 2017. Intangible capital is broadly defined and categorized into computerized information, innovative property and economic competency property. The finding suggests that the conventional GTFP is underestimated especially during the post-financial crisis period in China. It is also found that technical efficiency, which shows the trend of deterioration without capitalizing intangibles, improves steadily and jointly with technological progress contributing to the improvement of productivity. The mismeasurement of GTFP is more severe in developed regions in China where intangible investment is more emphasized. Furthermore, regional GTFP shows the trend of convergence after intangible capital is incorporated and the rate of convergence turns to be faster in coastal regions than that in the interior.

The modeling of earnings per share of Polish companies for the post-financial crisis period using random walk and ARIMA models

The proper forecasting of listed companies’ earnings is crucial for their appropriate pricing. This paper compares forecast errors of different univariate time-series models applied for the earnings per share (EPS) data for Polish companies from the period between the last financial crisis of 2008–2009 and the pandemic shock of 2020. The best model is the seasonal random walk (SRW) model across all quarters, which describes quite well the behavior of the Polish market compared to other analyzed models. Contrary to the findings regarding the US market, this time-series behavior is well described by the naive seasonal random walk model, whereas in the US the most adequate models are of a more sophisticated ARIMA type. Therefore, the paper demonstrates that conclusions drawn for the US might not hold for emerging economies because of the much simpler behavior of these markets that results in the absence of autoregressive and moving average parts.

The effect of NPLs management in the PIIGS banking efficiency: an approach using non-parametric partial order-m frontiers

PurposeThis study focuses on the banking systems evaluation in Portugal, Italy, Ireland, Greece and Spain (known as the PIIGS) during the financial and post-financial crisis period from 2009 to 2018.Design/methodology/approachA conditional robust nonparametric frontier analysis (order-m estimators) is used to measure banking efficiency combined with variables highlighting the effects of Non-Performing Loans. Next, a truncated regression is used to examine if institutional, macroeconomic, and financial variables affect bank performance differently. Unlike earlier studies, we use the Corruption Perception Index (CPI) as an institutional variable that affects banking sector efficiency.FindingsThis research shows that the PIIGS crisis affects each bank/country differently due to their various efficiency levels. Most of the study variables — CPI, government debt to GDP ratio, inflation, bank size — significantly affect banking efficiency measures.Originality/valueThe contribution of this article to the relevant banking literature is two-fold. First, it analyses the efficiency of the PIIGS banking system from 2009 to 2018, focusing on NPLs. Second, this is the first empirical study to use probabilistic frontier analysis (order-m estimators) to evaluate PIIGS banking systems.

Déjà Vu: CEO overconfidence and bank mortgage lending in the post-financial crisis period

This study examines the impact of CEO overconfidence on banks’ mortgage lending decisions in the post-financial crisis period. We find that banks with overconfident CEOs are more likely to approve mortgage loan applications of risky borrowers. Overconfident CEOs contribute to the riskiness of mortgage lending by encouraging banks to take on more risk. The positive effect of CEO overconfidence is more pronounced in banks with powerful CEOs, weak governance, low levels of technology adoption, and limited competition. Although improved bank regulations and intensified monitoring following the crisis have reduced the magnitude of this positive impact, it still exists, albeit to a lesser extent. Our findings remain consistent after endogeneity corrections and a battery of robustness tests. Overall, this study provides additional evidence of CEO overconfidence in shaping bank lending policies.

A MIDAS multinomial logit model with applications for bond ratings

In multinomial classification analysis, the issue of mixed-frequency data is becoming increasingly common. To solve the multiclassification problem in a mixed-frequency data environment with a large frequency ratio, we combine the restricted mixed data sampling (MIDAS) method with a multinomial logit (MLogit) model to construct a MIDAS-MLogit model. The MIDAS-MLogit model imposes functional constraints on high-frequency variable parameters and fully uses high-frequency information to complete multiclassification tasks in a mixed-frequency data environment. Through extensive Monte Carlo simulations, we prove that this novel MIDAS-MLogit model has better classification performance than conventional MLogit and U-MIDAS-MLogit models for solving multiclassification problems with a large frequency ratio. In addition, we use the MIDAS-MLogit model to predict the ratings of corporate bonds issued by Chinese-listed companies from 2008 to 2021 and find that its prediction accuracy outperforms several competitive models. We further verify the validity of the MIDAS-MLogit model for different periods, including the global financial crisis, the post-financial crisis, and the pandemic. The results show that all three models perform well during the global financial crisis, but the MIDAS-MLogit model predominates the post-financial crisis and pandemic periods. The empirical results also show that covariates from bond, corporate, and financial environment levels have varying effects on corporate bond ratings.

Whether Economic Policy Uncertainty Instigates an Increase in The Cash Holdings of Singaporean-Listed Firms?

Our paper investigates how economic policy uncertainty (EPU) affects Singaporean-listed firms’ corporate cash holdings after the global financial crisis. We apply various technical analyses for panel models of 4,253 yearly observations. Our results indicate that the Singaporean-listed firms’ cash holdings ratio (CHR) decreases when Singapore’s EPU increases in the period 2009–2018. Further, either global EPU or U.S. EPU indicators are correlated negatively with Singaporean-listed firms’ cash reserves. The corporate managers’ precautionary motive was not urged by the rise of EPU in the Singapore market. On the other hand, our empirical evidence suggests that Singapore’s corporate managers have an explicit speculative incentive in the context of the increased EPU in the post-financial crisis period. This research provides evidence that is at odds with the corporate managers’ classical view on precautionary cash savings in the context of the increased uncertainty of economic policy.

Impact of Monetary Policy on Financial Inclusion in Emerging Markets

The study investigates the impact of monetary policy on the level of financial inclusion in the big-five emerging market countries from 2004 to 2020. Several indicators of financial inclusion and the central bank interest rate were used in the analysis. It was found that the monetary policy rate has a mixed effect on financial inclusion, and the effect depends on the dimension of financial inclusion examined. Specifically, a high monetary policy rate has a significant negative impact on financial inclusion through a reduction in the number of depositors in commercial banks. A high monetary policy rate also has a significant positive impact on financial inclusion through greater bank branch expansion. The policy implication is that both contractionary and expansionary monetary policies lead to positive improvements in specific indicators of financial inclusion, because increase in interest rate leads to bank branch expansion which is beneficial for financial inclusion and decrease in interest rate leads to increase in the number of depositors in commercial banks which is also beneficial for financial inclusion. It was also found that the rising monetary policy rate has a negative effect on all indicators of financial inclusion in the post-financial crisis period. Overall, the effect of monetary policy on financial inclusion seem to depend on the monetary policy tool used by the monetary authority and the dimension of financial inclusion examined. The monetary authorities should pay attention to how their monetary policy choices might affect the level of financial inclusion and reduce the benefits that society gains from financial inclusion.

Exploring the Channel of Transmission between External Debt and Economic Growth: Evidence from Lower Middle Income Countries

The study intends to ascertain the pathway through which foreign debt affects GDP growth in lower-middle-income countries (LMICs). High external debt stock has been major source concern for many LMICs in the late 90’s and post financial crises period. Cross-section panel data from 30 countries were studied for the period 1999–2019 using a two-step system (GMM) estimation technique. The sample LMICs were further broken into Asian and African nations and the period was divided into 2010–2019 to assess the impact of post-financial crisis events. The research revealed a strong relationship between external debt and GDP growth via total factor productivity when the entire sample of LMICs was considered. However, the estimations also indicated that TFP is not a channel of transmission in Asian nations in both eras, namely 1999–2010 and the post-financial crisis period of 2010–2019, because foreign debt reduces total factor productivity. Furthermore, considering the entire sample and the post-financial-crisis period in African countries, external debt has a negative but minor connection with TFP. GDP growth shows a large and positive association with TFP in both periods in African countries.

Earnings announcement premium and return volatility: Is it consistent with risk-return trade-off?

Earlier studies document the earnings announcement premium, that the average stock return around earnings announcements is positive. This study examines the earnings announcement premium with a focus on the relationship between stock returns and return volatilities. Our findings can be summarized as follows. First, based on the long-term data including the post financial crisis period, we find that the earnings announcement premium still exists, positive and significant. Second, the announcement premium is positively related to the expected volatility. The positive relationship between the announcement premium and the expected volatility indicates a risk-return tradeoff, suggesting that investors hold on to their stocks expecting that their taking risk is compensated with returns. Third, we find that the announcement premium is inversely related to the realized volatility. The negative relationship is not confined to the group of negative earnings surprises. These results suggest that a dynamic of inverse relationship between returns and volatilities coexists with a risk-return tradeoff around earnings announcements. Extending our study to Asian-Pacific stock market might shed lights on commonalities and differences in international risk-return tradeoff.

Board Effect and the Moderating Role of CEOs/CFOs on Corporate Governance Disclosure: Evidence from East Africa

Synopsis The research problem This study examines the effects of board size and board independence, as well as the interaction effect between board independence and CEOs/CFOs on corporate governance disclosure practices. Motivation Despite corporate governance (CG) reforms around the world, research evidence indicates that the levels of corporate governance disclosures (CGDs) in developing countries remain poor due to weak institutions and corporate governance systems. In particular, the corporate boards as a key mechanism of CG and the board nomination processes in East Africa remain largely opaque and dominated by majority shareholders, chief executive officers, and chief finance officers (CEOs/CFOs), giving rise to opportunistic behaviors that may be detrimental to firm value. The distinctive feature of the board nomination process/CG system in East Africa has implications for monitoring and corporate governance disclosure practices and compliance and calls for systematic research in this under-explored subject. Hypotheses H1: The association between board size and corporate governance disclosure will be positive. H2: The association between board independence and corporate governance disclosure will be positive. H3a: The presence of the CEO on the nomination/remuneration committee will negatively moderate the relationship between board independence and corporate governance disclosure. H3b: The presence of the CFO on the nomination/remuneration committee will negatively moderate the relationship between board independence and corporate governance disclosure. H3c: The presence of the CEO and CFO on the nomination/remuneration committee will negatively moderate the relationship between board independence and corporate governance disclosure. Target population Stakeholders including firm managers, practitioners, regulatory authorities, policymakers, and investors. Adopted methodology Ordinary least squares (OLS), fixed-effects model, and system generalized method of moments (GMM). Analyses Using a large and hand-collected dataset comprising 1000 firm-year observations from 2007 to 2017 in East Africa, this study develops a corporate governance disclosure index (CGDI) of East Africa consisting of 164 provisions. To test our hypotheses, this study adopts three analytical approaches, namely OLS and fixed-effects (FE) regressions and the two-stage system GMM to address the endogeneity concerns. Findings We find that large boards and independent directors are associated with greater disclosure of CG information. Our analysis suggests that CEO/CFO power negatively moderates the link between board independence and corporate governance disclosure, unlike those environments with stronger institutions and corporate governance systems. Thus, firms whose CEO and CFO are involved in remuneration or nomination committees disclose less CG information. The combined effect of the CEO and CFO on selection and remuneration committees and an independent board in reducing corporate disclosure appears more pronounced for the post-financial crisis period compared with the crisis period.

U.S. small bank failures and the Financial Crisis of 2007–2009

This study utilizes logistic regression to identify annual financial statement and performance ratio factors that influenced the failure rate of U.S. small banks before and after the Financial Crisis identified during December 2007 through June, 2009. The study includes rates of small bank failure before and Financial Crisis spanning the years 2001 through 2014. The aim of the paper is to describe in large increase in U.S. small bank failure after the Financial Crisis. The Financial Crisis created drastic sustained changes of the financial system that were designed for large financial institutions. These changes may have created undue hardship for small banks and elevated the rate of small bank failures in the post-Financial Crisis period. Post-Financial Crisis bank failures had lower capital ratios and increased loan portfolio risk relative to the prior period. The combined effect of expansionist monetary policy, increased regulatory costs, and possession of illiquid real estate assets contributed to the higher rate of failure. The identification of factors that contribute to the increase in small bank failures after the Financial Crisis should assist bank managers, policy analysts, and scholars in developing alternative solutions for the future.

Revisiting the Relationship between Corporate Governance and Firm performance: Evidence from British Manufacturing Firms

This research looked at the link between corporate governance (CG) proxies and corporate financial performance (CFP) in the post financial crisis period for FTSE 350 enlisted firms while also revisiting the relevance of the agency theory to corporate governance mechanisms in the United Kingdom. OLS regression, Generalized Method of Moments (GMM) and Hausman test were applied to panel dataset of 230 FTSE 350 UK manufacturing firms over the period 2014-2018. The findings reveals that, with the exception of CEO duality and Firms growth where the Tobin's Q and Return on Asset (ROA) were the dependent variables respectively, other corporate governance mechanism such as board size and board independence, firm size, leverage, and growth had statistically insignificant effects on CFP. The results are robust when utilizing GMM estimation for adjusting for potential simultaneity and endogeneity problem. Contrast to prior findings in CG field this study suggest that firm internal CG traits do not play a substantial role in determining CFP in the UK context, and so provide more robust conclusions than prior studies in the field.

Institutional Investors and Earnings Management in the Korean Stock Market

ABSTRACT This study investigates whether the effectiveness of institutional monitoring varies depending on the economic conditions of emerging capital markets. By analysing the Korean context, we find that the proportion of institutional trading negatively correlates with income smoothing. This finding indicates that, given the Korean market’s structural characteristics (high ownership concentration, large systematic risk, and a high proportion of individual investors), institutional investors, on average, have a strong preference for short-term investments, which may lead to an increase in managers’ opportunistic earnings reporting to meet institutional investors’ earnings expectations. We select our sample period, with the 2008 financial crisis at its centre, and compare the relationship between the proportion of institutional trading and income smoothing across periods before and after the crisis. Notably, our findings show that, in Korea, the diminished effectiveness of institutional monitoring is more pronounced in the post-financial crisis period, characterised by sluggish market growth. Therefore, within emerging capital markets in a period of low market growth, institutional investors’ long-term investment preferences and monitoring may be subdued because the costs of institutional monitoring may outweigh its benefits. This study provides an improved understanding of the variations in institutional monitoring in emerging capital markets brought on by the market’s structural properties and conditions.

Risk management practices and credit risk of the significantly supervised European banks

PurposeThis paper aims to examine the influence of risk management (RM) practices on the credit risk of significantly supervised European banks.Design/methodology/approachTo avoid regulatory and reporting discrepancies, this paper samples banks that come under the direct supervision of the European Central Bank. Significantly supervised European Banks are selected for the five years from 2013 to 2017. The RM and governance data is manually drawn (from annual reports, registration documents, governance and RM reports), and financial data sets are also used (from Moody’s BankFocus and ORBIS).FindingsThe results indicate that strong risk control and supervision by a powerful chief risk officer (CRO) reduces banks’ credit risk. Banks with sufficiently powerful and independent CROs tend to manage their risks effectively, therefore reporting lower credit risk.Research limitations/implicationsEuropean Union introduced Capital Requirement Directive IV in 2013 and new guidelines on the banks' internal governance in 2017, which were to be implemented in 2018. Thus, this paper limited the sample to five years (from 2013 to 2017) to avoid inconsistencies in the results. Future studies can extend the research and compare banks' credit risk before and after the implementation of regulatory guidelines.Practical implicationsSince the global financial crisis, the regulatory environment has sufficiently changed. Hence, this study reveals that not all RM practices but a few important ones reduce credit risk.Social implicationsEffective risk control and supervision at the bank level can lower credit risk, ultimately enhancing overall financial stability.Originality/valueMost existing studies focus on classic governance indicators to analyze banks’ credit risk; however, this paper considers risk governance indicators which include RM practices used by European banks. Moreover, existing studies in this line focus on the crisis period of 2007–2008. This paper considered the postfinancial crisis period, specifically after the implementation of the Capital Requirements Directive IV at the European level.

MIFID II and EMIR impact on Romanian banking system performance

Abstract MIFID II/MiFIR represents comprehensive financial market reforms in trading and settlement of financial instruments. The greatest impact of the new regulatory framework in the banking sector relates to pricing, trading, and reporting of banking products and classification of financial institutions. The new role of the financial market infrastructure provides more protection for bank customers and significantly increases market transparency. Banks are required to show their customers the best execution price on the relevant trading venues, transaction costs and market behavior. The regulation will be aligned with other financial market regulations of over-the-counter markets and market abuse protection to avoid regulatory overlap - European Market Infrastructure Regulation (EMIR). The new regulatory framework requires the banking sector to fully comply with the rules governing the banking system of the European Union. Banks must incur significant costs in order to restructure internal processes, acquire new technological support, and forego additional profits in competitive and transparent markets. This study analyses the impact of MiFID II/MiFIR and EMIR implementation on local banks’ performance (credit institutions, Romanian legal persons). Using a unique dataset from banks that have been operating in Romania over the period 2004-2020, it is shown that the implementation of the new regulatory framework did not affect the net trading income ratio of the selected banks. Moreover, the average trading asset ratio in the post-financial crisis period increased in comparison with the average trading asset ratio in the pre-financial crisis period. Local banks that took advantage of the large economies of scale obtained due to branch banking did not reduce their investment banking activities and product offerings to customers in the period following the introduction of the regulatory framework. Most of the costs of implementing the new regulatory framework were borne only by the ultimate parents of the controlled Romanian subsidiaries. All subsidiary banks benefited equally from these economies of scale.

Does business strategy affect dividend payout policies?

This study examines the relation between a firm's business strategy and its dividend payout policies. Using a comprehensive measure of business strategy based on Miles and Snow's (1978, 2003) theoretical framework, we find that a firm's business strategy affects its dividend payout policies. Specifically, we document that firms following an innovation-oriented business strategy (PROSPECTORS) are less likely to pay, initiate, and increase dividends than those following a cost-effective business strategy (DEFENDERS). We also identify operating cash flow volatility and financial covenant constraints as two potential mechanisms through which innovation-oriented business strategy influences dividend payout policies. The business strategy effect is more pronounced in growth firms, the post-financial crisis period, and firms with lower CEO pay-for-performance sensitivity. Our results are robust to various tests, including the IV-Probit model, dynamic panel model, and entropy balanced approach.