Liquidity Risk Research Articles

Cash-Driven Resilience Capabilities and Cash Holdings of Manufacturing Companies During the Covid-19 Pandemic

Saving cash is one of the company’s precautionary motives. The Covid-19 pandemic has increased liquidity risk and more companies are experiencing financial difficulties. The cash holdings during the Covid-19 pandemic shows the company's resilience. This research aims to determine the state of cash-driven resilience and cash holdings of companies in Indonesia which are influenced by return on assets, profit margin, and productivity of assets, liquidity, leverage and firm size. The research was to observe the changes in cash-driven resilience, driven by changes in world conditions before the pandemic in 2018 and 2019, and during the pandemic in 2020 and 2021. This research uses purposive sampling technique on manufacturing companies on the Indonesia Stock Exchange. Hypotheses are analyzed using data regression models in Eviews 12. The research results are intended to help management determine the company's resilience and optimal level of cash holdings. This research found that there was no difference in CDR before and during Covid-19. There are differences between PA and LIQ variables on CDR but not on ROA, PM and LEV. The study also shows that there is no influence of ROA, PM, and LEV on CASH. Meanwhile PA, LIQ, and SIZE have positive effects on CASH. Keywords: Cash-Driven Resilience, Covid-19, Cash Holdings, and Financial Performance

Pengaruh Risiko Kredit terhadap Profitabilitas pada Bank Perkreditan Rakyat di Kepulauan Riau

The purpose of this research was to determine the effect of credit risk, liquidity risk, leverage, bank size, operating efficiency, inflation, gross domestic sales on profitability. This research uses quantitative method techniques and uses a purpose sampling method in analyzing research objects which also uses cross section and time series studies. The object of this research is the Rural Banks in the Riau Islands. A sample of 35 Rural Banks registered with the Financial Services Authority in the period 2017 to 2022. Data analysis used the SPSS Statistics 25 application and EViews 12 to obtain descriptive statistical data, panel regression analysis, F test, t test, and coefficient of determination. The results show that there is a significant influence on several variables. Where the variables credit risk, leverage, bank size, operating efficiency and inflation have a significant negative effect on profitability and the gross domestic gross variable also has a positive relationship with profitability. Meanwhile, liquidity risk has no influence on the profitability of Rural Banks in the Riau Islands.

The Real Effects of Financing and Trading Frictions

Abstract I develop a model revealing the interplay between a stock’s liquidity and the policies and value of the issuing firm. The model shows that bid-ask spreads increase not only the firm’s cost of capital but also the opportunity cost of cash, then lowering cash reserves, increasing liquidation risk, and reducing firm value. These outcomes are stronger when internalized by liquidity providers, simultaneously leading to a wider bid-ask spread. A two-way relation between the firm and the liquidity of its stock arises, implying that shocks arising within the firm or in the stock market have more complex implications than previously understood.

Banking Transparency, Financial Information and Liquidity Risk Management: Case of Saudi Banks

The article aims to assess the impact of banking transparency on liquidity risk. To do so, we first test the determinants of Liquidity Coverage Ratio (LCR) as well as ensure the resilience of the Saudi banking system over the period from 2014 to 2021. Using System GMM with bank-specific and macroeconomic variables, results show that capital adequacy ratio, SIZE, GDP growth as well as past LCR levels significantly influence the LCR.  Secondly, we adopt the Panel Vector Auto Regression (PVAR) approach to assess the response of the LCR to various shocks. Impulse Response Functions (IRF) and variance decomposition demonstrate that the shocks to past LCR, AQ, CAR and GDP increase future liquidity risk. Thirdly, we prove that Saudi banks implement less than 50% of the transparency dimensions. They mainly disclose financial information and information on information credibility. Barely 18% of information on non-financial components of banking activity is made available to the public. Information on liquidity risk and on the timeliness of information is not available either in annual reports or on the bank's website. On average, the banks in the sample do not give importance to the publication of reports. These results may undermine the effectiveness of the guidelines of the Basel Committee agreements to reduce risk-taking by Saudi banks.

Downside liquidity risk premium: From the perspective of higher moment

Considering the serious negative impact of crisis events on stock liquidity, we construct the liquidity skewness to depict the asymmetric distribution of liquidity, which is drawn inspiration from the idea of higher moment in statistics, to measure the downside liquidity risk. Our study focuses on the issue of downside liquidity risk premium in Chinese stock market, and further analyze its underlying source from the dual perspectives of behavior and risk. Our findings provide convincing evidence that the downside liquidity risk measured by liquidity skewness has a significant return premium, and the premium is long-term since the liquidity skewness has a persistent impact on the cumulative returns. Furthermore, the downside liquidity risk premium derives from risk compensation instead of behavioral factors such as mispricing and investor sentiment. The conclusions have certain theoretical value for improving and enriching the research on liquidity premium, clarifying the mechanism of the impact of downside change in liquidity on cross-sectional returns, and provide valuable references for investors to allocate portfolios that meet their own risk preferences and regulators to supervise the market.

Corporate Governance, Liquidity Risk, and Sustainable Growth Rate in the Nigerian Banking Industry

Purpose: The objective of this study was to investigate the impact of board independence, liquidity risk management, and other bank-specific factors on the sustainable growth rate of banks in a developing country. Theoretical framework: The study relied on two major theories: the Agency Theory, which explored the conflicts of interest between owners and managers, and the Resources-based View Theory (RBV), which examined how banks utilised unique resources to achieve competitive advantages and sustain growth. Design/methodology/approach: The study analysed panel data from twelve banks listed on the Nigerian Stock Exchange from 2008 to 2021. This study utilised the Feasible Generalised Least Squares (FGLS) regression technique, chosen for its effectiveness in addressing serial correlation and heteroskedasticity, to examine the effect of various factors on the sustainable growth rate. Findings: The study found that the sustainable growth rate (SGR) of banks was significantly affected by the interaction between corporate governance variables and factors such as liquidity risk, dividend payout ratio, bank size, asset quality, and operating margin. Additionally, board independence and bank performance may not be enough to ensure a bank’s resilience in volatile conditions. Research, Practical & Social implications: The study illuminated previously neglected factors that affect the sustainable growth rate of banks. Bank boards and policymakers can utilise these insights to enhance governance structures, risk management practices, and regulatory frameworks. This enhanced comprehension can contribute to a more stable financial system, improving public confidence and economic stability. Originality/value: This study addresses a notable research gap by examining the influence of board independence and bank-specific factors on the sustainable growth rate of banks. Prior research has predominantly focused on the non-financial services industry, leaving this area understudied.

Financial Risks in Mergers and Acquisitions (M&A): A Case Study of SolarCity’s Acquisition by Tesla

Mergers and acquisitions have morphed into a gateway for financial prosperity. However, research shows that a significant number of these deals do not pan out well thus introducing an element of risk. With Tesla geared at maintaining its position as a leader in the renewables market, its acquisition of SolarCity in 2016 is worth appraising. With quarterly data from Tesla, the study employs a mixed approach to ascertain the changes in various aspects of financial risk for the company. Results show that liquidity risk and solvency risk characterize Tesla’s post-acquisition period. This is further corroborated by insights from the profitability ratio analysis. As much as Tesla’s seems to be generating steady cash and posting high returns on its equity, the high lever is what seems to be playing a significant role. However, the silver lining in Tesla’s case is that the solvency ratios appear to be improving over time.

Do companies' risk perceptions affect investor confidence? Evidence from textual risk disclosure in the tourism industry

Few studies have examined tourism risk perception from a company perspective, which can better reflect their real risk situation. Moreover, when companies' risk perception is captured, it can have an impact on investor confidence and lead to abnormal market volatility. Therefore, it is essential to investigate tourism companies' risk perceptions and their effect on investor confidence. For this purpose, we first identify 31 risk perceptions from textual risk disclosures in annual reports using text mining technology. We then construct a panel regression model to assess its influence on investor confidence. This study overcomes the barriers to tourism companies' risk perception identification and effect characterization in data acquisition and technology. This work can enrich the research on tourism risk perception and improve tourism companies' risk management efficiency. The findings suggest that tourism companies should increase their protection against liquidity risk and actively explore international markets to enhance investor confidence.

Liquidity Risk Management of Agricultural Cooperatives in Isabela, Philippines

Purpose: The aim of this study is to examinethe liquidity risks the cooperative is exposed to, the effectiveness of liquidity risk management activities and the challenges faced by these selected agricultural cooperatives in Isabela in managing its liquidity risks. Theoretical framework: Cooperative development encompasses a wide range of individual and economic development issues. It is challenging for cooperatives of all sizes to control liquidity risk and assess the degree of uncertainty in their liquidity position. Since strategies for risk management are costly, cooperatives have had difficulties in reducing these liquidity risks, which might result in an increased rate of insolvency and pose problems for the financial condition of cooperatives. Design/Methodology/Approach: Data were gathered from 25 agricultural cooperatives located in the province of Isabela, Philippines through a four-point likert scale survey questionnaire, open and close-ended interview questionnaire and information from annual reports and financial statements. Quantitative data were analyzed using descriptive statistics. Findings: The results of the study revealed that agricultural cooperatives in Isabela are exposed to liquidity risk at low level. Numerous activities were implemented to minimize liquidity risk through liquidity risk identification, liquidity risk evaluation and liquidity risk mitigation. Moreover, cooperatives face various challenges in the implementation of risk management activities even though most of the cooperatives practice an effective liquidity risk management. Research, Practical & Social implications: The study will benefit the stakeholders of agricultural cooperatives in Isabela since cooperative operations are always evolving and liquidity risks are inherent in every organization. Originality/Value: The research examines agicultural cooperatives which is one of the organizations that provide assistance to the community. By producing liquidity risk management assessment, cooperatives will impove its operations and provide more support to its members.

A new in vitro study demonstrates that electronic cigarettes promote cellular carcinogenic characteristics.

Electronic cigarettes have been used as a new form of cigarettes, especially among young people, but the impact of these effects on mouth cancer is unknown. Therefore, there is a need for studies to evaluate their impact on health and oral mucosa. In this way, this study evaluates the risk of electronic cigarette liquid on in vitro cells of a panel: normal oral epithelium cell lines (NOE and HMK), oral squamous cell carcinoma human cell lines (CAL27 and HSC3), and a mouse oral cancer cell line (AT84). It was demonstrated that electronic cigarettes promote proliferation and anchorage-independent growth and induces morphological changes associated with enhanced motility and invasive phenotypes. Also, it was observed that the enhanced invasive migratory activity associated with the loss of epithelial markers, such as E-cadherin, and the acquisition of mesenchymal markers, strongly suggest that epithelial cells are undergoing to an aggressive phenotype within the framework of epithelial-mesenchymal transition. In conclusion, the liquid can promote carcinogenesis, in addition to promoting an aggressive phenotype in pre-existing lesions.

Non-linear Effect of Islamic Banks' Liquidity Risk to Financial Stability; Evidence from the Indonesian Banking Industry

Liquidity risk is a pivotal aspect that determines the soundness of financial performance in the banking system. Therefore, the study aims to examine the influence of Islamic banks' liquidity risk on banking stability. Using time series data ranging from 2004m1 to 2022m8, the study adopts a non-linear autoregressive distributed lag (NARDL) approach to examine the influence of liquidity risk on financial stability in the Indonesian banking sectors. The result of the study reveals that it has a non-linear and asymmetric relationship between liquidity risk and financial stability in the banking system. In the short run, an additional increase/decrease in the change of liquidity risk negatively affects financial stability. In addition, the long-run relationship shows that only an additional increase in change has a negative and significant relationship to financial stability. The COVID-19 pandemic also becomes a significant determinant that affects financial stability in the long-run relationship. The findings of the study imply that the Indonesian financial authorities should set suitable regulations to mitigate and address the issue of Islamic banks' liquidity risk, particularly in anticipating its non-linear and asymmetric impact on financial stability.

Impact of Key Bank Risk Components on Banking System Performance in Nigeria: A Discriminant Analysis Technique

Using discriminant analysis technique, this study evaluates the impact of key bank risk components on the banking system performance in Nigeria. The performance of the banking sector was evaluated to determine the extent to which each of the key risk components impacts on it. The findings revealed that credit risk, compliance risk and liquidity risk made outstanding contributions of 95.6 percent to the total discriminant score for the function, implying that successful performance of banking sector hinges mostly on the three risk factors. Credit risk

The Launch of a Night Trading Session and Currency Futures Market Liquidity: Evidence from the Thailand Futures Exchange

The Thailand Futures Exchange launched USD Futures as the first currency futures contract on 5 June 2012. However, it has been available for night trading since 27 September 2021. This research aims to analyze the effect of adding a night trading session on USD Futures market liquidity and to make a liquidity comparison between day and night session trading. By adding a dummy variable into the vector autoregression model of order 5 to capture the effect of a night session introduction on market liquidity, the results show that market depth and breadth are even stronger after a longer trading session. In addition, the t-test results show the presence of lower tightness but stronger depth and breadth in day session trading than in night session trading, because of the availability of a large number of orders and the ability of the market to have smoother trading in day as opposed to night. Due to the positive effect of extended trading hours on market depth and breadth, TFEX should consider a longer night session in line with other global futures markets. Night traders should also be aware of liquidity risk due to low night session trading volume.

Will the negative psychological perceptions of investors reduce platform liquidity? Evidence from China's online loans.

Market liquidity can reflect whether financial market conditions are favorable and is the primary concern for investors when making investment decisions. Therefore, investors' psychological perception and confidence in the quality of products (assets) are particularly important. Using 264 of China's online loan platforms from August 2017 to November 2018, we investigate the impact of the negative psychological perceptions of investors on platform liquidity. The empirical results suggest that the negative psychological perceptions of investors reduce platform liquidity and increase platform liquidity risk. Using the Baidu Search Index to measure investor sentiment, we find that the negative psychological perceptions of investors affect platform liquidity by affecting investor sentiment, which provides a good channel for explaining the main conclusions. Heterogeneity analysis shows that the impact of the negative psychological perceptions of investors on platform liquidity is smaller in high-quality platforms with higher market share and higher registered capital. Meanwhile, we also find that the impact of negative psychological perceptions of investors is greater in private platforms, after the rectification policy, with positive net inflow, and in first- and second-tier cities and coastal cities. Precautionary financial regulatory policies are necessary, not punishment ex post. The research findings of this article can assist investors, platform managers, and regulatory agencies in identifying the liquidity characteristics of platforms, which can contribute to strengthening market liquidity management and financial risk control and provide some reference and support for formulating sustainable development policies in the financial industry.

The effect of Asset quality on the Value of Commercial Banks in Kenya

Well-functioning banks diminish not only the transaction costs, but also the moral hazard and asymmetric information issues observed in the financial market. Despite the role played in financial inclusion, commercial banks in Kenya have seen increased liquidity risk, declining profitability and credit risk that has weakened the sector's stability. This research sought to determine the effect of asset quality on commercial banks value in Kenya. The study was anchored on four main theories including Capital Structure Irrelevance Theory, Interest Rate Theory, Signaling theory and liquidity preference theory. This study adopted an explanatory research design and followed a positivism research philosophy. The study involved all the 43 commercial banks in Kenya which were selected using census sampling. The study covered a 7-year period between 2014 and 2021. Secondary data was used for the study and was obtained from the audited annual financial reports of the commercial banks in Kenya and CBK. The collected data was analyzed by uses of descriptive and inferential analysis with the help of Statistical Package for Social Sciences (SPSS) version 26 and STATA. Tables and figures were used to present the analyzed data. The study established that Asset Quality has a positive impact on the commercial banks value in Kenya. The study concludes that banks should improve their asset quality by adopting effective risk management strategies and banks to improve their management efficiency by investing in employee training and development programs, adopting technology to automate processes, and streamlining operations. Commercial banks can improve their liquidity by implementing effective liquidity risk management strategies. The study recommends the banks to improve their asset quality by adopting effective risk management strategies.

The effect of capital adequacy on the Value of Commercial Banks in Kenya

Well-functioning banks diminish not only the transaction costs, but also the moral hazard and asymmetric information issues observed in the financial market. Despite the role played in financial inclusion, commercial banks in Kenya have seen increased liquidity risk, declining profitability and credit risk that has weakened the sector's stability. This research sought to establish the effect of capital adequacy on value of commercial banks in Kenya. The study was anchored on four main theories including Capital Structure Irrelevance Theory, Interest Rate Theory, Signaling theory and liquidity preference theory. This study adopted an explanatory research design and followed a positivism research philosophy. The study involved all the 43 commercial banks in Kenya which were selected using census sampling. The study covered a 7-year period between 2014 and 2021. Secondary data was used for the study and was obtained from the audited annual financial reports of the commercial banks in Kenya and CBK. The collected data was analyzed by uses of descriptive and inferential analysis with the help of Statistical Package for Social Sciences (SPSS) version 26 and STATA. Tables and figures were used to present the analyzed data. The study established that Capital adequacy has a positive impact on the commercial banks value in Kenya. The study concludes that financial soundness indicators such as capital adequacy are more important in determining the ability of a bank to produce value for its share-holders. The study recommends banks to improve their capital adequacy by retaining profits or raising new capital through various means such as issuing new shares, selling assets, or borrowing from financial institutions. Additionally, banks to improve their asset quality by adopting effective risk management strategies and banks should improve their management efficiency by investing in employee training and development programs, adopting technology to automate processes, and streamlining operations. Commercial banks can improve their liquidity by implementing effective liquidity risk management strategies.

Funding liquidity risk and the volatility of U.S. municipal green bonds during the COVID-19 pandemic

This study adopts the funding liquidity–market liquidity model developed by Brunnermeier and Pedersen (2009) to investigate the relationship between funding liquidity risk and the volatility of U.S. municipal green bonds during the COVID-19 crisis, while also accounting for other potential risk factors. We observe that during high levels of municipal green bond volatility, the effect of funding liquidity risk on volatility is more pronounced than during periods of low municipal green bond volatility. Moreover, the response of municipal green bond volatility to a shock in the funding liquidity risk is stronger compared to a shock in other risk factors.

What are the determinants of non-performing financing in Islamic banks during Covid-19?

<p>Several trading and banking sectors strive to survive the current pandemic. Despite the intense competition in the financial industry recently, Islamic banks have demonstrated remarkable growth. However, the issue of defaults in Islamic banks often arises, where debtors cannot repay the obtained financing, disrupting banking performance. This research investigates the factors influencing funding troubles in Islamic banks, especially during COVID-19. Specifically, this study examines whether factor-specific banks and macroeconomics in Islamic banks control troubled funding. The research utilizes quarterly data from Islamic banks in Southeast Asia (Malaysia and Indonesia) from 2020 to 2021. The findings indicate that liquidity risk, inefficiency, and economic growth do not significantly affect troubled financing in Islamic banks. At the same time, capital, profitability, and inflation significantly negatively impact funding troubles. These results recommend that Islamic banks increase their capital and profitability proportion to reduce the risk of funding trouble.</p>

Constructing early warning indicators for banks using machine learning models

This research contributes to bank liquidity risk management by employing supervised machine learning models to provide banks with early warnings of liquidity stress using market-based indicators. Identifying increasing levels of stress as early as possible provides management with a crucial window of time in which to assess and develop a potential response. This study uses publicly available data from 2007 to 2021, covering two severe stress periods: the 2007–2008 global financial crisis and the COVID-19 crisis. The current version of the developed model then applies backtesting using the data from the COVID-19 crisis. The findings of this study show that the ensemble model with the RUSBoost algorithm predicts “red” and “amber” days with a success rate 21% greater than the average of other machine learning models; thus, it can greatly contribute to bank risk management.

Bank- specific determinants of liquidity risk for commercial banks in Algeria: Panel data analysis during 2005-2020

This study aims to monitor a group of factors that cause liquidity risks and contribute to the occurrence of liquidity problems by testing the determinants of liquidity risk and the explanatory factors of the liquidity problem in Algerian commercial banks. This study seeks to highlight the importance of commercial banks’ liquidity in financing investments to generate profits and the need to maintain appropriate levels to meet liquidity needs. Using panel data for a sample of nine Algerian banks during the period 2005–2020, the study found that the explanatory variables of the liquidity risks that cause liquidity problems in Algerian commercial banks by using the liquid assets to total assets index ratio are: return on assets, return on equity, and capital adequacy ratio, with an explanatory capacity of 59.44%. Analysis of the results of the fixed effect model showed an inverse correlation between the return on assets and liquidity risks. There was a statistically significant positive relationship between the return on equity, capital adequacy ratio, and liquidity risk. There was a negative, but not statistically significant, relationship between bank size, the loan loss provisions to total loans ratio, and liquidity risk. The study recommends that to increase the volume of assets, there should be a corresponding increase in liquid assets as a precaution against liquidity risks in Algerian banks. Also, other determinants are not addressed in the study, which requires further research into the determinants of liquidity risk in Algerian banks.