Traditional Financial Measures Research Articles

Measuring ESG risks in multi-asset portfolios: Decomposing VaRESG into CVaRESG

This study investigates the contribution of different asset classes to investment portfolio risk by integrating environmental, social, and governance (ESG) factors into traditional financial risk measures. We propose a new methodology for decomposing VaRESG by measuring the Component VaRESG (CVaRESG) of a multi-asset financial portfolio. A pilot empirical application's results provide evidence of the reliability of CVaRESG to define the maximum contribution of the risk accepted for securities or parts of the financial portfolio. This study contributes to the debate on how ESG factors can have quantifiable long-term financial impacts and clarifies the risk contribution of each security included in a financial portfolio.

Non-Financial Capital Value Creation: Assessing Japan's Path to an ESG-Friendly Economy through the Yanagi Model

This paper explores the possibility of Japan adopting the Non-Financial Capital and Equity Spread Synchronization Model, also known as the Yanagi Model, to build an ESG-friendly economy. The Yanagi Model focuses on incorporating non-financial elements, such as environmental, social, and governance factors, into companies' traditional financial performance measures. By doing so, the model aims to enhance firms' long-term sustainability and value creation. The paper assesses the potential benefits and challenges of implementing the Yanagi Model in the Japanese context through a review of relevant literature and case studies. The literature suggests that integrating ESG factors can lead to improved financial performance, reduced risk, and increased reputation for companies. However, there are also concerns about the lack of standardization and transparency in ESG data, as well as the potential for greenwashing or superficial adoption of ESG practices. Despite these challenges, the paper argues that the Yanagi Model could serve as a viable path for Japan to build an ESG-friendly economy, given the country’s recent push for sustainability and the growing demand for socially responsible investments. The paper suggests several recommendations for improving the model, such as increasing transparency and standardization in ESG data, enhancing stakeholder engagement, and promoting a culture of long-term value creation. Overall, the paper concludes that while there are challenges to adopting the Yanagi Model, its potential benefits for building a sustainable and ESG-friendly economy in Japan make it a worthwhile pursuit.

Integrating ESG risks into value-at-risk

This study addresses the regulatory request for sustainability-related risk integration into traditional financial risk measures. We propose a new risk metric that combines a traditional market risk measure expressed in terms of Value-at-Risk (VaR) and environmental, social, and governance (ESG) factors. The new metric, VaRESG, considers the orthogonality of the ESG criteria with fundamental variables, applying a perturbative approach and an entropy function of ESG factors. The pilot empirical application relies on a financial portfolio comprising approximately 3000 equities. The results show the predictive power of VaRESG to reduce unexpected losses (i.e., out-of-VaR). The results were confirmed especially under stress conditions, when the values of losses were higher (in terms of magnitude). To the best of our knowledge, this is the first attempt in the financial literature to effectively integrate ESG risks into the VaR measure to predict the expected losses of an equity portfolio. The measure of VaRESG can be useful to asset managers and institutional investors to reduce unexpected losses, and to supervisors interested in increasing the level of accuracy of VaR estimations.

Asymmetric and threshold effects of FinTech on poverty in SSA countries

PurposeThe purpose of this paper is to analyze the dynamic asymmetric relationship between financial technology (FinTech) adoption and poverty alleviation on annual data for the Sub-Saharan Africa (SSA) region over the period from 2004 to 2020.Design/methodology/approachThis study adopted the general method of moments (GMM) method on annual data for 127 countries including 45 countries from the SSA region over the period from 2004 to 2020.FindingsThe study’s findings show that improvement in FinTech may initially decrease the rate of extreme poverty, leading to a decrease in total poverty as a percent of the population. While there is an initial decrease in the rate of extreme poverty with improvements of FinTech, once the FinTech index reaches its threshold level of 37.18 points, further improvement in FinTech tends to decrease as penetration increases, giving rise to an decrease in the rate of poverty alleviation.Research limitations/implicationsPolicymakers should design more aggressive and comprehensive policies directed at recouping the maximum gains of FinTech adoption, with a reasonable threshold target.Practical implicationsPolicymakers in the SSA region must be aware of a FinTech threshold level of 37.18 points. To ensure the highest reduction in extreme poverty, policymakers must keep investing in FinTech to reach this threshold level.Social implicationsFinTech improvement leads to poverty alleviation. Policymakers in the SSA region can fully recoup the benefits of FinTech by achieving a pre-set threshold level.Originality/valueThis paper addresses that gap in the literature by studying the impact of FinTech, instead of the traditional financial inclusion measures, on poverty in the 45 countries in the SSA region, exploring the potential dynamic asymmetry of this poverty-FinTech link, and testing the presence and statistical significance of the threshold level of FinTech.

Mixed-methods research in the age of analytics, an exemplar leveraging sentiments from news articles to predict firm performance

Investors and companies have always aspired to make informed investment decisions by using diverse information sources. With the explosion of information sources on the web and emergence of predictive analytics, many investors moved beyond traditional financial measures, as key predictors of firm performance, to textual content from analysts’ reports. Empirical research suggests that these information sources complement each other by providing a clear picture of firm performance, but remains silent on the role of additional textual content that continues to emerge and reach more potential investors on the web. We build on this line of research to examine the effect of textual content from business journals in conjunction with summary measures on cumulative abnormal returns. We use sentiment analysis with machine learning and econometrics methods to examine content extracted from textual articles about S&P 500 index companies that are published in the Wall Street Journal (years 2013–2016). Textual analysis of business journals in conjunction with quantitative measures revealed direct and interaction effects on abnormal returns over time. We also tested for robustness by replicating the analysis with different variable operationalization and observe consistent patterns. Relative to positive sentiments, negative sentiments have more profound effects on cumulative abnormal returns. The effect of positive sentiments becomes weaker when past quantitative measures are high. As information sources continue to emerge on the web, this work makes key contributions to the practice of sentiment analysis in financial markets.

The Relationship between ESG and Financial Performance Indicators in the Public Sector: Empirical Evidence from the Republic of Serbia

Research Question: This paper investigated whether a relationship exists between environmental, social and corporate governance (ESG) performance indicators and financial performance measures in the public sector. Motivation: Performance measurement plays a significant role in public management and public policy and could be considered to be a segment of the whole performance management process. Growing awareness of climate change, human capital and corporate governance issues have imposed the necessity of introducing environmental, social and corporate governance performance indicators (ESG) in public enterprises’ annual reports. ESG performance indicators encourage investors to make socially responsible investment decisions (De Lucia, Pazienza & Bartlett, 2020). Hence, the paper is focused on the specifics of measuring performance in the public sector. Besides, it is very interesting to acquire knowledge about the correlation between ESG indicators and financial performance measures (Kalaitzoglou, Pan & Niklewski, 2020; Landau, Rochell, Klein & Zwergel, 2020). Idea: The purpose of the research is to highlight relevant performance measures in the public enterprises in the energy sector in the Republic of Serbia and to examine whether the application of the ESG indicators implies better financial performance. Data: Four large Serbian companies in the energy sector were analysed. Data were collected on the web site of the Agency for Business Registers of the Republic of Serbia. The observation period is from 2017 to 2019. The financial performance indicators are ROA, ROE and the economy ratio. Tools: Based on annual financial statements, non-financial reporting of public companies is monitored, whether companies invest in environmental and social protection, as well as whether they implement activities directed to more consistent implementation of corporate governance. The dynamics of selected financial indicators is analysed according to base and chain indices. Findings: The results show that the public enterprises in the energy sector of the Republic of Serbia mainly report on traditional financial measures in their annual financial statements. One of them applies all ESG indicators and the others do it partially. However, no direct and positive correlation between ESG indicators and financial performance measures could be found. Conversely, there is the case that ESG indicators have no linkage with the financial performance measures. Contribution: This paper contributes to the existing literature in the field of public enterprises’ sustainability.

Forecasting volatility by integrating financial risk with environmental, social, and governance risk

AbstractThe study aims to verify whether the consideration of a risk measure based on environmental, social, and governance (ESG) factors can reduce the difference between the ex‐ante financial risk and ex‐post volatility of financial assets. The statistical models are run on 17,996 firm‐year observations (3332 active firms from 55 countries and 10 industries, listed on the ECPI Global Ethical Equity index) in 2007–2015. According to our main results, the forecasting effectiveness of traditional financial risk measures can be improved by integrating financial risk with an ESG risk measure that considers the ESG entropy. We found that the dispersion of ESG scores within a country, sector and year is a risk factor that would be helpful in predicting the volatility of financial assets. Other similar long‐run risk measures, such as issuers' credit ratings, do not reveal the same forecasting power. By reducing unexpected volatility, especially in the medium term, the ESG risk measure provides investors and fund managers with a useful metric for decision making.

Inclusion of CSR in the extended performance satisfaction index – new development

Companies and organisations apply non-financial performance measures, such as human capital, brand equity and customer assets as corporate brand amplifier as well as to complement indicators of traditional financial measures. It is crucial to understand how companies and organisations may use non-financial assets to create value for their stakeholders. Using customer perception data from the Extended Performance Satisfaction Index (EPSI) Rating database, this study evaluates the relationship between customer satisfaction and corporate social responsibility (CSR). We apply the EPSI model 1 and find a positive relationship between CSR and customer satisfaction, mediated by the effect of CSR on company image. Furthermore, there are non-linear relationships between CSR and customer satisfaction, leading to a proposed CSR-effect curve. From a managerial perspective, the effect of CSR on customer satisfaction is a function of the company’s perceived efforts related to CSR. Hence, an improvement in CSR ratings from customers is expected to impact the business’ bottom line, since improvement in customer satisfaction is known to positively impact financial performance.

Microfoundations of collaborative networks: The impact of social capital formation and learning on investment risk assessment

Both traditional financial and intangible asset (IA) performance measures aid in the design of micromanagement organizational systems. We shed light on the microfoundational processes of collaborative networks and their impact on investment risk assessment by exploring IA performance measures in response to decomposing macro-level constructs. The IA measures focus on the exploration of individual human capital and their actions and interactions that influence investment risk assessments, which is critical for long-term prosperity. Additionally, human capital herein includes social factors such as social capital, which research has demonstrated can be developed from intellectual capital, and vice versa. Findings from an experiment with 40 professional investors (resulting in 160 independent observations) suggested that belonging to a company's collaborative networks—where they would gain access to IA performance information—led them to adjust their investment risk assessments downward or upward in response to material weakness or strength disclosures pertaining to IA performance. Additionally, a laboratory experiment revealed that 121 novice investors who learned how to interpret and use their social networks to gain access to IA performance information also led them to adjust their investment risk assessments in response to material IA information deficiencies in target companies. The results showed IA knowledge can be learned and transferred to impact social change.

Indigenous investments: Are they different? Lessons from Iwi

Iwi, the tribal entities of the Māori people of Aotearoa New Zealand, now manage billions of dollars, a task requiring increasing sophistication in their investment strategies. Asset classes of Iwi have evolved from the properties, fisheries quotas, and cash they received through Aotearoa New Zealand’s Treaty settlement process to now include major investments in private equity, infrastructure, and other financial assets. The literature has, however, been largely silent on Iwi investments. Performance discussions tend to emphasize a western approach focusing on traditional financial performance measures. Using Waikato-Tainui operated Tainui Group Holdings (TGH) as an example, we analyze a sample of corporate disclosure documents. We find the intent of tribal (Iwi) investment firms may not be adequately captured through traditional investment frameworks and classic performance metrics. Drawing parallels between Iwi investment firms and impact investing widens the scope for financial managers to think differently about how we quantify Indigenous investment performance.

Performance indicators in the construction industry: a study with Portuguese companies

This paper aims to study the use of performance indicators (PIs) by business managers in the civil construction sector in a region that encompasses eight districts located in the north of Portugal. Through the literature review, it was possible to gather a list of twenty potential PIs used in this sector. Subsequently, a questionnaire was applied to a sample of construction companies from this region. A statistical analysis of the data collected allowed to identify the twelve most used and most important PIs for the companies surveyed. The results indicate that the companies involved in this study mainly use the traditional financial measures, however, recognize that non-financial measures, namely the customer satisfaction index, employee satisfaction, internal customer satisfaction index, and the training of employees, are increasingly important for the success of companies. The study also analysis the criteria to select PIs, its main benefits, and difficulties faced by companies on their usage.

Towards Strategic Business Performance of the Hospitality Sector: Nexus of ICT, E-Marketing and Organizational Readiness

Purpose: This study aims to present a strategic business performance (SBP) model for firms operating in the hospitality industry by providing them guidance on how to use information and communication technologies (ICTs) and e-marketing to attain strategic performance. This paper also explores the moderating role of organizational readiness in the relationship between ICT and e-marketing. Methodology: Data were collected from the top, middle, and operational managers in 4-star and 5-star hotels. To test the mediating role of e-marketing in the relationship between ICT and SBP, Preacher and Hayes’s (2008) approach was used along with the bootstrap method. Regression analysis was carried out to examine the moderating role of organizational readiness. Findings: ICTs provide opportunities to execute e-marketing activities for achieving competitiveness. The empirical findings proved that the use of ICTs provides a basis for establishing a successful e-marketing mechanism that helps hotels to achieve SBP. Furthermore, ICTs’ influence on e-marketing is strengthened by organizational readiness. Originality/value: This paper adds to previous literature on ICTs, SBP, and e-marketing by examining the role of e-marketing and ICTs in positively contributing to the hotels’ SBP, which is a broader measure of firms’ business performance, as compared to the traditional financial or operational measures of a firm’s performance. Since previous studies on the links between ICTs, e-marketing, and firm performance are based on conventional measures of firm performance, this study offers new insights into the nexus of ICTs, e-marketing, and firm performance.

Strategic Risk Management Analysis PT Indo Tambangraya Megah, Tbk. (Case Study Period 2011-2014, Amid Declining Coal Price)

The Management Strategy in mining business companies are unique and specific study, where modern mining was started to produce massive coal in the era of Industrial Revolution in England in 18th (eight teens) century, and throughout the rest of Europe due to Industrial booming, this situation continued to all over the world along with economic growth in which country surrounding where utilization of coal and minerals are required systematically then which a called as modern mining will be exploited continue till today. Decision-makers need a technical strategy and systematic analysis tools to scan the latest trend situation and condition of natural environment business, both external and internal, then assessed it and fixed it. Wheelen, make it Four Basic Elements of Management Strategy, starting with 1) Environmental Scanning, 2) Strategy Formulation, 3) Strategy Implementation, and 4) Evaluation and Control (Monitoring) Performance. In conducting to monitoring or evaluation, measurement tools the performance of the company is essential, Wheelen describes several measuring devices such are Activity Based Costing, Traditional Financial Measures, Balance Score Card, Stake Holders and Share Holders Value. The crucial thing is Enterprise Risk Management (ERM). Research has proven that the ERM in its implementation, need risk management strategies to be able to do early detection, to the survival and sustainability of the company as part of Strategy Management.

The Effect of Adopting Balanced Scorecard (BSC) as Strategic Planning Tool on Financial Performance of Banks Operating in Palestine

This research investigates the effect of BSC on the financial performance of banks operating in Palestine, across BSC’s four perspectives: financial; customers; internal business processes; innovation, growth and learning. It seeks to identify the relationship between BSC and the financial performance of banks operating in Palestine.
 
 For this purpose, the research population comprises all 14 banks operating in Palestine. As a result of the small size of the population, the ‘complete census’ method has been used: the sample is the whole population. The questionnaire was distributed to 130 respondents (employees) at banks: branch managers, heads of departments, directors of departments and financial controllers. Financial performance was used as a dependent variable, while the following four independent variables served as hypothesized determinants: (i) financial perspective, (ii) customers’ perspective, (iii) internal business processes perspective, and (iv) innovation, growth and learning perspective. The Multiple Linear Regression test at 95% confidence was used, resulting in three significant variables: financial perspective; internal business processes perspective; and innovation, growth and learning perspective. Overall, the adjusted R2 = 0.62. This measure is acceptable, and reveals that the resulting model interprets 62% of the determinants of financial performance.
 
 The most important results of this study are: (1) the BSC model can be used to enhance the financial performance of banks operating in Palestine, and (2) the customers’ perspective in the BSC model did not have the same effect as other perspectives. Moreover, (3) in their measurement of performance, banks operating in Palestine apply clear strategic performance measures, including traditional financial and non-financial measures, while noting that their use of these measures does not mean that they apply them under the remit of a BSC model. These measures can be reclassified within the four perspectives of the BSC model.
 
 The main recommendations are that (1) banks operating in Palestine should implement BSC as an integrated system for strategic management, and as a means for decision-making by management. Its application achieves many advantages that enhance the competitive position and financial performance of banks. Furthermore, (2) banks operating in Palestine need to pay more attention to strategy, and measurements that are included in the customers’ perspective of BSC. There is also a need to (3) conduct training courses for bank employees on BSC and how it can be used. Finally, there is a need to (4) conduct further investigation of the effect of adopting BSC as a strategic planning tool on the financial performance of banks operating in Palestine, as well as (5) a study of the effect of BSC when taking into consideration the type of bank - Islamic or commercial, local or foreign.

Pendekatan Balanced Scorecard Sebagai Alat Ukur Kinerja Pt. Perkebunan Sumatera Utara

One indicator of the financial performance of the Return On Investment and Return On Equity in PT Perkebunan Sumatera Utara tend to be experiencing a decline, but this does not automatically indicate the condition of the company are not optimal. The values ??of the financial ratios only indicate financial performance so that there is a tendency to ignore this aspect of non-financial, such as customer satisfaction, productivity, and cost-effectiveness process used to produce products and services, and empowerment, and employee commitment to delivering products and services for customer satisfaction. Performance measurement that takes into account the financial aspects and non-financial aspects are balanced scorecard still maintaining the traditional financial measures.
 The purpose of this study which analyzes the performance of PT Perkebunan Sumatera Utara comprehensive and can serve as the basis for long-term planning and to recommend steps that need to be done by the management of PT Perkebunan Sumatera Utara, so that the measurement results Balanced Socrecard can be implemented in improving company performance by considering four perspectives ,
 The results showed that the first perspective learning and growth perspective shows an increase in the number of employees who attend training and development, increasing the ratio of the load of training and development as well as increased capital organization proven to increase customer satisfaction and employee motivation. In the perspective of both the internal business processes perspective shows PT Perkebunan Sumatera Utara able to create quality products. The third perspective which shows the customer perspective customers are satisfied with the quality of services provided by the company. Net profits are seen fluctuations, the average profit per customer and profitability per customer increased, while average operating expenses per customer declined. The fourth perspective of the financial perspective showed increased growth in revenue and net profit margin however decreased ROI.

The effects of business model regulation on the value relevance of traditional performance measures. Some evidence from UK companies

The first case in the world of a mandatory requirement to disclose business model (BM) in the annual report is represented by Companies Act 2013 issued in the UK. The BM offers a simplified representation of a company's key resources and of how these are combined to create value. For this reason, a systematic communication of BM should affect the way a company's book value and its capability to generate earnings are perceived. The purpose of this work is to investigate the impact of mandatory BM disclosure on the value relevance of traditional financial measures. Focusing on a sample of UK listed companies over a six-year period, Ohlson model is utilized to assess the value relevance of book value and net income and their interactions with a dummy variable that accounts for the introduction of mandatory disclosure of BM. In line with previous studies on non-financial disclosure regulations, results show that the introduction of the mandatory requirement to disclose BM has a negative moderating effect on book value of equity and a positive moderating effect on net income. As this is the first study to investigate the effects of a mandatory BM disclosure regime, it could be of interest for both academics and standard-setters.

Exploration and comparison of traditional financial performance measures of Indian manufacturing industries

Exploration and comparison of traditional financial performance measures of Indian manufacturing industries

Are CSR activities associated with shareholder voting in director elections and say-on-pay votes?

When making investment decisions, many investors now regularly consider a company’s CSR activities along with traditional financial performance measures (Elliott et al., 2014). Our study considers whether shareholders may also consider CSR activities when voting in director elections and say-on-pay votes. We find that CSR performance is associated with shareholder support in both director elections and say-on-pay votes. In particular, we find higher support for both director elections and executive compensation when there are more CSR strengths. Additionally, we find that the social strength aspect of CSR is the most important component in the relationships between CSR and director elections and that the environmental strengths aspect is the most important component in the relationship between CSR and executive compensation. Our results suggest that shareholders may value certain types of CSR and are more supportive of boards and management when CSR performance is stronger.

Intellectual Capital, Innovation and Firm Performance of Pharmaceuticals: A Study of the London Stock Exchange

The objective of this study is to explore the empirical structural links among intellectual capital (IC), innovation and firm’s financial performance, furthermore, the impact of IC and innovation on firm’s financial performance has also been measured. Value added intellectual coefficient model (VAIC) has been used for the measurement of IC. Innovation is measured through research and development (R&D), products development and products in pipeline, whereas, financial performance is measured through traditional financial measures such as return on assets (ROA), return on equity (ROE), earnings per share (EPS), assets turnover ratio (ATO) and market-to-book ratio (MB). The study was based on secondary data, and it has been collected from the published annual reports of listed pharmaceutical firms in London Stock Exchange. The research was carried for the three year period of 2012–2014 and our sample consists of 207 firm-year observations. Structural Equation Modelling (SEM) technique is used to address cause–effect relationships among endogenous and exogenous constructs. Empirical results of SEM analysis support that IC and its components have positive and significant impact on innovation and firms’ financial performance. Moreover, innovation also has significant impact on firms’ financial performance. The study is valuable for the manager, decision makers and policy makers to recognise the value of IC and its philosophy to obtain and sustain competitive advantage through innovation.

NONFINANCIAL PERFORMANCE EVALUATION AS SIGNIFICANT AREA OF STRATEGIC BUSINESS MANAGEMENT

The main aim of this paper is to provide the answer to the questions: Which areas of the company play an important role in the evaluation of the performance? Which areas are considered to be important? Due to the fact that the business environment is constantly changing, changes also occur in the trends relating to performance. Traditional financial performance measures have been highly criticized and the need identified to integrate non-financial perspectives, such as the level of innovation, degree of motivation, intellectual capital, and other criteria. Intellectual capital is often a crucial factor in the creation of value in a company. Based on the research, employees and customers are one of the most important areas in the companies from the selected area. At the same time, dependence among these company’s areas and company’s profit has been identified. Furthermore, it has been found whether the introduction of social responsibility into business strategy affects responsible behaviour just in the working environment (as this is geared specifically to employment area). Thus, as regards business strategy and support to work environment, in this case no relationship has been indicated, therefore it is not possible to say that if companies apply social responsibility strategy, they support mainly the working environment.