Pre-financial Crisis Period Research Articles

Makroekonomske, institucionalne i financijske odrednice deficita tekućeg računa u Sjevernoj Makedoniji

The role of current account balances in macroeconomic policy is progressivelyhigh, especially in transition countries. Using yearly level data for a 1994-2022period, based on co-integration analysis, this research empirically investigates themacroeconomic, institutional, and financial determinants of the current accountdeficit in North Macedonia. The results of the study reveal that a country’s currentaccount deficit is significantly affected by domestic demand factors like realeffective exchange rate, output gap, and trade openness, the fiscal-related factor ofgross debt position, the institutional-related factor of economic freedom, legal andproperty rights, regulatory index, control of corruption, government effectiveness,as well as financial development captured by money supply. The study also findsout that the country has recorded more deficit in the current account thanpotentially expected during two time periods, the pre-financial crisis period 2001-2008 and during the COVID-19 crisis period 2019-2022.

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.

Does oil price uncertainty affect corporate innovation?

This study examines the relation between oil price uncertainty (OPU) and corporate innovation productivity. Using firm-level innovation data of US firms, we find that OPU is negatively associated with future innovation outcomes, proxied by the number of patents and subsequent citations, and the dollar value of innovation. However, this negative relation is more pronounced for non-green innovation than for green innovation and predominantly driven by oil supply shocks. Our supply-side explanation suggests that since oil supply shocks induce uncertainty about future economic growth opportunities and cost of operation, firms tend to decrease their investment in innovation activities. This negative relation is pronounced more in manufacturing firms and firms located in non-oil-producing states, and the pre-financial crisis period. Further analysis suggests that increases in the cost of external financing and cash holdings appear to be the underlying mechanisms through which OPU impedes firm innovation. The results survive from several model specifications, alternative variable definitions, and controlling additional firm and macroeconomic factors. Overall, OPU seems to have an important implication in shaping firms' investment in innovation. Several implications are discussed.

Fisher's hypothesis in time-frequency space: a premier using South Africa as a case study.

Fisher hypothesis is universally accepted as an integral portion of monetary theory and practice, and yet the empirical evidence confirming a full Fisher effect remains scarce and the relationship has been challenged on several theoretical grounds referred to as ‘puzzles’. Our paper suggests the use of continuous wavelet transforms as a unified analytical framework for confronting the different Fisher puzzles in a harmonious way. Taking South Africa as a case study, we focus on the inflation targeting period of 2002:01–2021:02 and use signal-image conversion tools such as wavelet power spectrum, wavelet coherence spectrum and phase-difference dynamics to extract signal features of nominal interest rates and inflation expectations and further explore their dynamic synchronization across a time–frequency plane/domain. Three unique findings emerge from our study. Firstly, across a time domain a full Fisher effect only holds in the pre-financial crisis period. Secondly, across the frequency spectrums, higher frequency oscillations gradually lose relevance to lower frequency oscillations providing evidence of volatility transfer in the Fisher effect. Lastly, the phase-dynamics indicate a consistent positive synchronization throughout the sample period which is line with the traditional Fisher effect. Overall, these findings highlight the success of the South African Reserve Bank in using inflation targeting to steer the expectations of economic agents under the tenures of the last three governors and provide important lessons for other Central banks.

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.

Big 4 auditors, bank earnings management and financial crisis in Africa

PurposeThis paper aims to examine whether African banks audited by a Big 4 auditor use loan loss provisions (LLPs) for earnings management purposes before, during and after the global financial crisis. It focuses on income smoothing as a type of earnings management.Design/methodology/approachThe study analyzed banks in 21 African countries from 2002 to 2014. The estimation techniques used are the fixed effect regression technique, descriptive statistic and Pearson correlation statistic. The model used in the study expresses LLPs as a function of its discretionary and non-discretionary determinants.FindingsAfrican banks audited by Big 4 auditors use LLPs to smooth income and the incentive to smooth income is greater during an economic downturn or recession. Also, African banks audited by a Big 4 auditor use income smoothing to lower high earnings during the financial crisis and in the pre-financial crisis period but not in the post-financial crisis period.Originality/valueThe literature shows that the presence of Big 4 auditors improves earnings quality. The direct impact of Big 4 auditors on earnings management in African banks has received little attention in the literature, and the impact of audit quality on bank earnings smoothing particularly in Africa is yet to be known.

Application of Taylor Rule Fundamentals in Forecasting Exchange Rates

This paper examines the effectiveness of the Taylor rule in contemporary times by investigating the exchange rate forecastability of selected four Organisation for Economic Co-operation and Development (OECD) member countries vis-à-vis the U.S. It employs various Taylor rule models with a non-drift random walk using monthly data from 1995 to 2019. The efficacy of the model is demonstrated by analyzing the pre- and post-financial crisis periods for forecasting exchange rates. The out-of-sample forecast results reveal that the best performing model is the symmetric model with no interest rate smoothing, heterogeneous coefficients and a constant. In particular, the results show that for the pre-financial crisis period, the Taylor rule was effective. However, the post-financial crisis period shows that the Taylor rule is ineffective in forecasting exchange rates. In addition, the sensitivity analysis suggests that a small window size outperforms a larger window size.

European FDI in Ireland and Iceland: Before and after the Financial Crisis

This paper analyses Foreign Direct Investment (FDI) investment in Ireland and Iceland from other European countries during two periods, i.e., the pre-financial crisis period of 2000–2007 and the financial crisis period of 2008–2010. The aim of this research is to determine what made the countries interesting to foreign investors in both good and bad times; and, secondly, to examine whether European Union membership (and the Euro) made a difference in this respect. The results were obtained by using data from the OECD, the World bank, and other sources. The model constructed for the study applies the inverse hyperbolic sine transformation of the gravity model, which is a novel approach. The results demonstrate that before the financial crisis of 2008, European Union (EU) membership did not help Ireland attract more FDI from other EU countries. However, once it had been hit by the crisis, Ireland attracted more FDI from other EU countries. Iceland, on the other hand, which is not an EU country, attracted FDI from non-EU countries rather than from EU countries before the financial crisis. After the crisis, however, the origin within Europe, of FDI in Iceland had no significant effect on the flow of FDI into the country.

Connectedness Among Economic Policy Uncertainties: Evidence from the Time and Frequency Domain Perspectives

AbstractThis paper investigates the frequency connectedness among economic policy uncertainties of G20 countries using the novel frequency connectedness proposed by Barunik and Krehlik (2018) which can depict the dynamic connectedness not only over time but also across different frequencies. The empirical results obtained in this paper demonstrate that, firstly, the connectedness among economic policy uncertainties is significant, and the spillover effects during the financial crisis and the post-financial crisis period are stronger than the pre-financial crisis period. Secondly, the United States, France, and Australia are the main net-transmitters of the economic policy uncertainty spillovers while Brazil, Italy, Mexico, and Russia act as the main net-recipients of the spillovers. Thirdly, the major international events may significantly enhance the spillover transmissions of economic policy uncertainty among different countries, thus increasing the magnitude of the total connectedness. Finally, the economic policy uncertainty spillovers are mainly transmitted in the short term, i.e., 1∼4 months instead of longer time horizons in terms of the magnitude of the frequency connectedness measures. The findings of this paper not only have profound theoretical and practical significance but also provide several significant implications for the policymakers, supervision agents, international traders, and various investors.

ACCRUALS IN THE PREDICTION OF FORTHCOMING CASH FLOWS IN THE COMPANIES LISTED AT PAKISTAN STOCK EXCHANGE

This research founds the relative predictabilities of accruals and further disaggregated accruals– trading accruals, non-trading accruals, and financial accruals in the estimation of future cash flows. The research also examines the effect of the global financial crisis on this association between accruals and future cash flow prediction. The research uses annual data from the period of 1999 to 2018 from 453 firms, which includes 9060 observations. The whole sample period covers data from 1999 to 2018, during the financial crisis period from 2008-2009 and Pre financial crisis period from 1999 to 2007 and Post global financial crisis period 2010 to 2018. To examine the relationship between accruals, disaggregated accruals, and estimation of future cash flows, hypotheses were developed and seasoned through OLS. The outcomes confirm that financial accruals, non-trading accruals, and total aggregated accruals were significant, but trading accruals was not a significant contributor to the estimation of future cash flows. Moreover, there was no significant effect of the global financial crisis on the relationship among disaggregated accruals and forecast of imminent cash flows during Pre and Post and during the global financial crisis period. Keyword: Accruals, Trading Accruals, Financial Accruals, Non-trading Accruals, Global Financial Crisis JEL Classifications: GO1; G30 DOI: https://doi.org/10.32479/ijefi.10313

Energy Related CO2 Emissions before and after the Financial Crisis

The 2008–2009 financial crisis, often referred to as the Great Recession, presented one of the greatest challenges to economies since the Great Depression of the 1930s. Before the financial crisis, and in response to the Kyoto Protocol, many countries were making great strides in increasing energy efficiency, reducing carbon dioxide (CO2) emission intensity and reducing their emissions of CO2. During the financial crisis, CO2 emissions declined in response to a decrease in economic activity. The focus of this research is to study how energy related CO2 emissions and their driving factors after the financial crisis compare to the period before the financial crisis. The logarithmic mean Divisia index (LMDI) method is used to decompose changes in country level CO2 emissions into contributing factors representing carbon intensity, energy intensity, economic activity, and population. The analysis is conducted for a group of 19 major countries (G19) which form the core of the G20. For the G19, as a group, the increase in CO2 emissions post-financial crisis was less than the increase in CO2 emissions pre-financial crisis. China is the only BRICS (Brazil, Russia, India, China, South Africa) country to record changes in CO2 emissions, carbon intensity and energy intensity in the post-financial crisis period that were lower than their respective values in the pre-financial crisis period. Compared to the pre-financial crisis period, Germany, France, and Italy also recorded lower CO2 emissions, carbon intensity and energy intensity in the post-financial crisis period. Germany and Great Britain are the only two countries to record negative changes in CO2 emissions over both periods. Continued improvements in reducing CO2 emissions, carbon intensity and energy intensity are hard to come by, as only four out of nineteen countries were able to achieve this. Most countries are experiencing weak decoupling between CO2 emissions and GDP. Germany and France are the two countries that stand out as leaders among the G19.

The revenue persistence of US accounting firms: impacts of SOX and financial crisis

Purpose Typical accounting firms offer three types of accounting services to their clients: accounting and auditing (AA), tax (TAX) and management advisory services (MAS). Each accounting service has a different revenue persistence. Moreover, revenue persistence is affected by exogenous events such as new regulations (e.g. Sarbanes-Oxley Act [SOX] in 2002) and market conditions (e.g. the financial crisis of 2008). This paper aims to examine the revenue persistence of accounting services and how it is affected by SOX and the financial crisis. Design/methodology/approach Using 742 firm-year observations from 100 of the largest US accounting firms from 1999 to 2015, this paper examines whether revenue from AA, TAX and MAS has different degrees of persistence and how SOX and the financial crisis in 2008 change the revenue persistence of each accounting service. Findings This paper finds that MAS generates more persistent revenue than AA and TAX. SOX enhances the revenue persistence of MAS. The financial crisis makes revenue from AA less persistent than during the pre-financial crisis period. Originality/value This paper contributes to the understanding of the revenue persistence of accounting services and the impact of exogenous events such as SOX and the financial crisis of 2008.

Financial crisis and real earnings management in family firms: A comparison between China and the United States

This paper compares real earnings management (REM) between Chinese family firms and U.S. family firms after the financial crisis of 2008. For the U.S. sample, there is greater REM in family firms than non-family firms, and in the post-financial crisis period than the pre-financial crisis period. For the Chinese sample, there is greater REM in family firms than non-family firms, but REM is lower in Chinese family firms relative to non-family firms in the post-financial crisis period than the pre-financial crisis period. These findings indicate that REM activities differ between U.S. and Chinese family firms in crisis and non-crisis periods.

Securitizations and accounting restatements

Purpose The purpose of this paper is to establish a direct link between securitizations and accrual-based earnings management by investigating whether financial statements in the periods of securitizations are more likely to be restated at a later time. In addition, this study examines whether the association between securitization and accounting restatements is more pronounced in the pre-financial crisis period and for banks with less independent or industry-specialized auditors. Design/methodology/approach This study covers a sample of bank holding companies with restatement information between 2001 and 2012. Using the incidence of material accounting restatements as a proxy for accrual earnings management, this study investigates whether securitizations are likely used as a tool for accrual earnings management. A logistic model is applied with standard errors clustered at the firm-year level. Various robustness tests are conducted to rule out the possibilities that the results are driven by unintentional reporting errors or endogeneity of the securitization decisions. Findings The empirical results reveal a positive and significant association between banks’ securitization activities and the likelihood of having accounting restatements. Moreover, this positive association is more pronounced in the pre-financial crisis period and for banks with less independent or industry-specialized auditors. Research limitations/implications The findings suggest that managers take advantage of discretions on accounting rules for securitizations to manage earnings. This evidence provides multi-dimension implications for standard setters and practitioners, as well as investors. Originality/value This is one of the very first papers to document evidence that accrual earnings management is involved in securitization.

THE IMPACT OF THE FINANCIAL CRISIS ON CORPORATE CAPITAL STRUCTURE DYNAMICS IN THE NORDIC COUNTRIES

The concept of corporate capital structure is dynamic in nature as the changing economic and business situations influence on it. Financial crisis of 2007-2008, among other things, have led companies to bring important changes in their capital structure. In turn, capital structure has also influenced corporate risks and the weighted average cost of capital of the firms. However, this topic is under-researched in general and in the context of Nordic countries, in particular. This paper examines the determinants that have affected firm-level corporate capital structure across Nordic countries during the financial crisis sub-period (2007-10). In addition, we also study and compare the same phenomenon during the pre (2003-06) and post financial crisis (2011-17) subperiods. The principal finding of the study underlines that during the pre-financial crisis period, firms producing high accounting- and market returns borrow less, thus rendering their capital structure more towards equity capital as more debt increases fixed cash outflows in the form of debt servicing. However, during and post financial crisis sub-periods firms giving better performance, with reference to the same benchmarks, borrow more. Several factors can be attributed this finding such as high risk premium to the equity investments due to adverse equity investment climate, falling interest rates during the financial crisis and increasing non-performing assets accumulated with banks. The current paper contributes to the body of knowledge, both academic and practitioners, in several ways. First, the study identifies the key determinants affecting capital structure in the pre, during and post financial crisis sub-periods and thus portraying a comprehensive and in-depth picture. Second, the study explores how the capital structure affects the risk and weighted average cost of capital (WACC).

Composition of an Optimal Portfolio in the Capital Market - Elton & Gruber Model in Portugal’s Capital Market

In order to maximize their utility function, investors select some assets over others by choosing the ideal portfolio that will maximize their wealth. Each asset is chosen taking into account the relationship between the risk of that particular investment (usually measured by variance)- and the return it can offer, as well as the risk between this and other assets (as measured by covariance). The purpose of this work was to build an optimal portfolio using data on PSI-20's stock prices (2008-2016) where investors are aware of risk and want to minimize it. For this purpose, an optimal portfolio’s comparison in the period between 2004-2007 was conducted. This period was referred to as the financial pre-crisis, compared to the optimal portfolio obtained in the period after the financial crisis (2008-2016). The methodology used to estimate the expected profitability of each asset that makes up the PSI-20 was obtained by extracting the historical quotations from the Euronext Lisbon website. The Elton & Gruber model was used in order to determine the optimal portfolio, as well as the assets that should be part of it. In the period after the financial crisis, it can be verified in the optimal portfolio’s composition that, in the periods after the financial crisis and the financial crisis, there were no stocks to be included in the optimal portfolio, and an analysis in smaller periods was made. In the post financial crisis period actions were found with an attractiveness index superior to the cut-off point, which would lead them to be included in the optimal portfolio, and it was verified that the large distribution sector with (32.15%) has the greatest weight in the optimal portfolio, considering also the Oil and Gas (19.95%), Banking (11.84%) and Production (8.09%) sectors. While addressing shorter periods in pre financial crisis period, no asset was included in the optimal portfolio’s constitution.

SEC Supervisory Activity in the Financial Industry

This study documents a higher incidence of SEC Comment Letters among financial institutions characterized by abnormal levels of loan loss provisions (LLPs). In particular, results show that this effect is stronger for banks overestimating LLPs, suggesting an asymmetric attitude of the SEC Research Division toward overestimations compared with LLPs underestimations, especially in the pre-financial crisis period. Finally, the study demonstrates that after receiving a Comment Letter by the SEC, financial institutions change the way they account for LLPs by basing their computation more on historical data, thereby reducing the level of discretion embedded in their calculation.

Downside Risk Analysis of Returns Financial Institutions of Pakistan

This study empirically tested the standard CAPM and DR-CAPM to examine the cross-sectional variation in stock returns of financial institutions listed at PSE over the period 2002-2016. The analysis is also performed for three sub-periods: pre-financial crisis period (2002-2005), during- financial crisis period (2006-2009), and post-financial crisis period (2010-2016). The empirical analysis is carried out following the two-pass regression analysis of Fama & Macbeth (1973). The results of the study suggest that the standard CAPM is not suitable for calculating the risk and required rate of returns for Pakistani financial institutions. To examine the validity of DR- CAPM, we estimate the downside beta developed by Bawa and Linderberg (1977), Fishburn (1977), Harlow and Row (1989), and Estrada (2002). Out of these models, the DR-CAPM of Fishburn (1977) appeared to be more appropriate for calculating required rate of returns. The DR-CAPM of Harlow and Row (1989) also provides evidence of a positive and statistically significant risk-return relationship in most of the examined sub-periods. However, the results for Estrada (2002) are inconclusive at best, suggesting that the downside beta of Estrada (2002) is an inefficient measure of risk. The results help investors in identifying an appropriate and suitable measure of risk for financial institutions of Pakistan, which, in turn, enables the investors to design an efficient and well-diversified portfolio. The results are also of great significance to managers of financial institutions as they help them in making capital budgeting decisions and calculating the cost of equities.

Financial Crisis and Corporate Social Responsible Mutual Fund Flows

In this paper, we investigate investment flows into mutual funds that hold more high corporate social responsible stocks (top CSR funds) vs. mutual funds that hold more low corporate social responsible stocks (bottom CSR funds). Using a large sample of equity mutual funds spanning 2003–2012, we find that top CSR funds on average receive about 5% less investment per annum compared to the other funds; whereas bottom CSR funds receive about 5.6% more investments. These relative negative and positive flows into the top and bottom CSR funds respectively were larger during the pre-financial crisis period (2003–2007). This trend, however, reversed during the financial crisis (2008–2009). Top CSR funds attracted about 8.7% more investments during the financial crisis compared to the pre-crisis period; whereas bottom CSR funds received about 9.8% less investment. This higher investment into the top CSR funds during the crisis seems to have disappeared during the post-crisis period (2009–2012). Additional analysis shows that the corporate social ratings of top CSR funds improved through the crisis, whereas it deteriorated for the bottom CSR funds. Our findings are consistent with the “flight to quality” phenomenon observed in financial markets during market crises, indicating that investors perceive top CSR fund investments as relatively safe or of higher quality and hence, invest more in them during financial crises.