Two-step System GMM Research Articles

Examining the impact of liquidity creation on bank stability in the Asia Pacific region: Do ESG disclosures play a moderating role?

The global financial crisis reignited concerns regarding the stability and sustainability of banks. Since liquidity creation (LC) is a core output of banks, we examine if the nexus between LC and bank stability is conditional on ESG (environmental, social, and governance) disclosure by banks. Our sample comprises 178 commercial banks (1568 observations) during the period 2010–2019 in the Asia-Pacific region. Using a two-step system GMM estimation, our results document a positive impact of LC on bank stability. Additionally, ESG disclosures positively moderate the stability effect of LC, i.e., higher LC is associated with significantly more enhancement in bank stability for banks that have a higher disclosure of ESG scores compared to banks that have a moderate disclosure. Furthermore, we also provide evidence of variation in the moderating role of ESG disclosures in advanced and emerging economies. Overall, our results recommend that integrating ESG practices into banks' internal processes improves their financial soundness. Additionally, blanket implementation of liquidity regulations might be detrimental to banks’ stability.

Nexus of governance, macroeconomic conditions, and financial stability of banks: a comparison of developed and emerging countries

The study aims to explore the impact of governance and macroeconomic conditions on financial stability in developed and emerging countries. The study sample comprised 122 countries from 2013 to 2020, and a comprehensive set of variables was used to construct the financial stability index (FSI). The results of the two-step system GMM analysis, robust with D–K regression, indicate that interest rate, GDP growth, voice and accountability, political stability and absence of violence/terrorism, government effectiveness, regulatory quality, and control of corruption have a positive and statistically significant impact on financial stability. However, inflation, money supply, and the rule of law have adverse and insignificant effects on financial stability. Notably, the findings vary between developed and emerging countries due to differences in governance and macroeconomic conditions and their role in financial stability. The study concludes that regulatory governance and macroeconomic conditions are crucial for financial stability. These outcomes are significant for central banks, academia, and policymakers, as they emphasize the need for stable financial systems and sustainable, balanced growth through governance and macroeconomic conditions.

Do agency costs and business risk affect the corporate sustainability–financial performance relationship?

PurposeThe aim of this research is to examine the effect of corporate sustainability performance on financial performance and the role of agency costs and business risk in determining this effect.Design/methodology/approachThis study uses the data of 83 non-financial Turkish firms listed on Istanbul Stock Exchange during the period 2014–2021. Two-step system GMM models are applied to examine the study’s hypotheses.FindingsThe results indicate a positive effect of corporate sustainability performance on financial performance, and that this effect is significant only for firms that are more likely to suffer agency costs of equity, firms with R&D expenditures and firms with lower business risk.Practical implicationsThe results of this study confirm the importance of regulations introduced by regulators to support the sustainability initiatives for firms that have less ability to access funds required for their investments. In addition, the findings provide important insight into the role of the persistence of corporate sustainability performance in enhancing financial performance through mitigating managers' opportunistic behavior.Originality/valueTo the author’s knowledge, this research is one of few that examine the effect of agency costs and business risk on the corporate sustainability–financial performance relationship in emerging markets.

EFFECTS OF FINANCIAL MARKET DEVELOPMENT ON BANK CAPITALIZATION RATIO: EVIDENCE FROM COMMERCIAL AND NON-COMMERCIAL BANKS IN TANZANIA

Financial market development in many developing countries is a series of financial market reforms aimed at improving the market and the financial system in general. Theoretically, major reforms that improve the stock market are expected to increase bank performance by reducing bank risk of default by increasing the bank capitalization ratio. This results in stability in the financial market and banking sector. Nonetheless, empirical literature in addition shows that the quality of the financial market may be at high risk following the reforms process because of the integration effects of the markets across the countries or regions. A good example of this is the global financial crisis of 2007/2008. Based on this background, the present study investigates the extent to which the financial market development in Tanzania influences the bank's capitalization ratio (commercial and non-commercial banks). Employing a two-step system GMM technique in a dynamic panel dataset regression model for the investigation for a period of 2012 to 2021, while macroeconomic and bank-specific variables have been used as control variables. We proxy financial market development as stock market development. This study finds that stock market development in Tanzania measured in terms of stock market turnover ratio improves bank capitalization ratio with the goals of enhancing the financial market and maintaining stability in the banking sector.

Audit Committee and Timely Reporting: Evidence From Turkey

This paper seeks to examine whether the characteristics of the audit committee impact the timely reporting represented by audit report lag (ARL), firm-based abnormal audit report lag (FAARL), and industry-based audit reports lag (IAARL). The sample of the study includes mostly hand-collected 2,284 firm-year observations obtained from Turkey’s listed non-financial companies. Main regression results show that audit committee gender diversity, meeting frequency, and independence are negatively associated with timely reporting. Furthermore, additional analysis indicates the negative association between timely reporting and the audit committee effectiveness indexes created by the coexistence of the audit committee. Also, an interaction effect between audit committee independence and gender diversity concerning the timeliness of financial reporting has been documented. The use of fixed effects estimators and two-step system GMM estimator also supported the main results. This paper aims to provide concrete contribution to the literature by examining timely reporting in an emerging market like Turkey. The results suggest that regulatory bodies and companies should review the audit committee structure to better timely reporting and reduce firm and industry-based abnormal delays.

Determinants of Indonesia’s Regional Economic Growth During The Era of Regional Autonomy

Economic growth is one measure of the success of a region, as seen by the increasing amount of Gross Regional Domestic Product (GRDP) produced from time to time. The urgency of this study is that the determinants of regional economic growth have not included many exogenous variables in the model, especially non-economic variables. The results for estimating the economic growth model do not reflect the actual conditions of regional economic growth, so strategies for encouraging sustainable regional economic growth cannot be realized. This research aims to know and analyze the determinants of regional economic growth in 34 provinces in Indonesia. The approach used in this study is a quantitative method with static and dynamic panel data regression in the 2015-2022 timeframe. The best way to interpret this study is the two-step system GMM model. The findings of this study conclude that fiscal decentralization, capital expenditure, democracy index, happiness index, and internet access positively impact economic growth. Recommendations for this research include increasing regional self-reliance by exploring tax potential for development, providing space for freedom for the community, increasing people's living standards to make them happier, and encouraging infrastructure development so that investors are willing to invest in growing people's employment opportunities.

Sovereign Wealth Fund and Fiscal Performance: A Case of Nigeria in the Midst of Other Natural Resources Rich Countries in Africa

In spite of several postulations that sovereign wealth fund’s stabilization fund promotes smoothness in the fiscal performance of nations, there are contrary views that it does not. This study investigates the impact of sovereign wealth fund on fiscal performance using Nigeria and 21 other natural resources rich countries in Africa with data spinning from 2003 to 2018. The study made use of Two-Step System GMM and found that sovereign wealth funds have about 0.8 percent positive insignificant impact on the fiscal performance implying that having a sovereign wealth fund in place improves nation's fiscal performance. Consequently, the study recommends that the governments and the management of the various existing funds in Africa should put in more efforts in improving sovereign wealth fund performance; natural resources rich Africa countries without sovereign wealth fund should consider establishing theirs; and the control of corruption, strengthen of financial institutions, reduction in the cost of oil production and increase in general revenue should be taken seriously as they enhance fiscal performance.

The moderating role of shadow banking on the finance-growth nexus

ABSTRACT This study uses data from 28 countries to document the moderating role of shadow banking on the finance-growth nexus during the period between 2010 and 2020. Employing both static (fixed effects and random effects with Driscoll-Kraay standard errors) and dynamic (two-step System GMM) panel estimators, the findings reveal that the marginal effects of financial development on economic growth increases with the levels of shadow banking activity prevailing in the country.

Capital Structure, Firm Performance and Risk Exposure: New Evidence from OECD Countries

Optimal capital structure is a key tool to take advantage of the trade-offbetween firm performance and risk. Based on this, we examine how optimalcapital structure influences corporate performance and risk exposure.We use a strong-balanced panel of 3,344 firm-year observations from 10different OECDcountries for 2006–2016. Results reveal that firms havingshort-term debt normally experience high accounting-based performancewhile lowering market-based performance, firms using long-term and totaldebt are largely exposed to decreased accounting and market-based performance.The higher the long-term and total debt, the greater the chancesthat firms become vulnerable to insolvency risk. Findings are robust acrossalternative indicators of capital structure, firm performance and risk, alternativemodel development and the two-step system GMM estimator tocontrol endogeneity issues. This research will be of importance to firmmanagers and policymakers in designing an appropriate capital structurefor maximizing firm performance while minimizing debt-taking risks.

Uncovering the role of foreign ownership in the relationship between board nationality diversity and ESG

This study investigates the relationship between board nationality diversity (BND) and environmental, social, and governance (ESG) in developing countries. It also highlights the role of legitimacy concerns in investigating how foreign ownership moderates the connection between BND and ESG due to the increased liability of foreignness. Using a sample of listed firms in Johannesburg stock exchange (JSE) in South Africa over 2015–2020, our two-step system GMM findings show that board nationality diversity positively affects ESG. Moreover, our study found that foreign ownership strengthens the positive connection between BND and ESG. Our study contributes to the literature by highlighting the importance of legitimacy theory in the dynamic nexus between BND and ESG. The findings of this study have substantial implications for firms, investors, and stakeholders.

Does export intensity of heterogeneous firms affect leverage? Evidence from a small open economy

Exports at firm level improve the financial performance and thereby contribute to economic growth. Exporting activities require additional financing and become a challenge to manufacturing firms, thus affecting managerial financing decisions. This study explores the impact of export intensity on leverage by using a dataset of manufacturing firms. The results of two-step system GMM reveal that export intensity negatively influences the leverage. We find that a firm’s size positively impacts the leverage, while cash holding has a negative connection with leverage. Finally, we note that board size exhibits a positive relationship to leverage. These findings suggest important policy implications for export promotion, specifically for a small open economy. The results are robust to different sensitivity checks.

The Influence of Economic Uncertainty on Food Security and the Moderating Role of Trade Openness in Developing Countries

This research examined the influence of economic uncertainty and the moderating role of trade openness on food security in 58 developing countries from 2012 to 2021. The dynamic panel data from the two-step System GMM was utilized to accomplish this. The findings of this research revealed that economic uncertainty did not exert a significant influence on food security in developing countries. Conversely, trade openness demonstrated a positive and significant effect in enhancing food security. Trade openness strengthened the adverse influence of economic uncertainty on food security in developing countries. The estimation results show trade openness has a significant positive effect of 0.0518, economic uncertainty has a positive but insignificant effect on food security, and Economic uncertainty when moderated by trade openness, shows a significant negative effect of -0.0533. The findings indicate that economic uncertainty does not significantly affect food security in developing countries. However, trade openness positively and significantly influences food security, suggesting that increased trade openness can enhance a country’s food security. The results reveal a significant negative effect when considering both trade openness and economic uncertainty. It implies that implementing policies that reduce trade openness can enhance food security in high economic uncertainty.

Does increasing environmental policy stringency enhance renewable energy consumption in OECD countries?

The literature lacks enough evidence on the effect of environmental policy stringency on renewable energy consumption. Therefore, the main objective of this study is to investigate the causal effect of the revised version of the Environmental Policy Stringency Index (EPS) and its components on Renewable Energy Consumption (REC), taking into account environmental innovation, trade openness, economic growth and consumer price index. To this end, we carry out dynamic and static analyses of the yearly data of 32 OECD countries during the period from 1990 to 2019. The two-step system GMM estimator and the forward-orthogonal deviations-GMM technique are used to deal with the potential endogeneity, serial correlation and cross-sectional dependence in the dynamic regression, while the Driscoll-Kraay standard errors technique and quantile regression are employed to estimate the static model. Unlike the existing literature, our results reveal that increasing environmental policy stringency can promote renewable energy. Both market and non-market-based environmental policies and technical support policies show positive effects on green energy use. These results imply that OECD governments can play a vital role in achieving the goal of net zero CO2 emissions by 2050. Increasing the stringency of the policies that put a price on pollution (such as energy taxes) raises the cost of polluted energy use, leading to a shift toward clean energy under the substitution effect. In addition, increasing the public R&D expenditure on solar and wind energy technologies can reduce renewable energy costs and prices, thus facilitating its generation and diffusion.

ESG activity and bank lending during financial crises

This paper explores how banks’ environmental, social, and governance (ESG) activities affect their lending during financial crises. We use a sample of European listed banks with available ESG scores from 2002 to 2020 and consider the global financial crisis of 2007–2009 and the European sovereign debt crisis of 2010–2012. We estimate a two-step system GMM dynamic panel data model and also address potential endogeneity with instrumental variable (IV) and difference-in-difference (DiD) estimations. We find that lending falls to a lesser extent for banks with higher ESG scores during crisis times. Our findings are robust to using alternative ESG rating providers. An investigation of the different potential channels shows that, during crises, banks more engaged in ESG activities are less affected in terms of credit risk, asset risk, and profitability. They also face a lower reduction in market funding, allowing them to downsize to a lesser extent during crises, and their deposit rates do not increase as much as in less ESG-engaged banks. A deeper investigation reveals that our findings mainly hold for banks focused on traditional lending and deposit activities and are essentially driven by the environmental pillar component of ESG scores and the global financial crisis of 2007–2009.

Leverage and regulatory capital ratios in Japan

PurposeThis study aims to understand how quickly Japanese banks readjust their capital ratios (leverage, regulatory capital, tier-I capital and common equity) following an economic shock.Design/methodology/approachThis study uses a two-step system GMM framework to test the study's hypotheses using the annual data of Japanese commercial and cooperative banks ranging from 2005 to 2020.FindingsThe findings show that banks adjust their leverage ratio faster than regulatory capital, tier-I capital and common equity ratios. In addition to that, the results reveal that the speed of capital adjustment is higher for commercial banks than for cooperative banks, suggesting higher economic costs and implications for commercial banks. Furthermore, it is worth noting that well-capitalised (under-capitalised) banks tend to prioritise the adjustments to common equity (leverage) before considering the adjustments to leverage (common equity). According to the results, high-liquid (low-liquid) banks alter their regulatory capital and tier-I capital ratios (leverage) more quickly (more slowly) than low-liquid (high-liquid) banks.Practical implicationsThe findings suggest that when formulating and implementing new banking regulations, particularly in assessing and adjusting specific capital requirements under Pillar II of Basel III, management (including bankers, regulators and policymakers) should consider the heterogeneity observed in the rate of capital adjustment across various bank characteristics. Additionally, bank managers should also consider the speed of adjustment when determining optimal half-life and target capital structures.Originality/valueTo the author's knowledge, this study represents a pioneering investigation into the rate of adjustment of capital ratios (leverage, regulatory, tier-I and common equity) within Japan's banking sector. The study employs a comprehensive dataset encompassing both commercial and cooperative banks to facilitate this analysis. A notable contribution to the existing body of literature, this study offers a detailed analysis and emphasises the varying degrees of adjustment in capital ratios. The study also highlights the heterogeneous nature of the adjustment rate in these ratios by categorising the data into well-capitalised, under-capitalised, highly liquid and low-liquid banks.

Impact of competition and concentration on bank income smoothing in Central and Eastern European countries

PurposeThis study examines the impact of competition and concentration on bank income smoothing in Central and Eastern European (CEE) countries.Design/methodology/approachThe two-step system GMM method was used to analyse the impact of competition and concentration on bank income smoothing in 17 CEEs from 2004 to 2015.FindingsLoan loss provisions (LLPs) are negatively related to bank competition and concentration. The authors find no evidence for income smoothing using LLPs in a high-competition or high-concentration environment.Research limitations/implicationsA limitation of the study is that the analysis was restricted to commercial banks. The authors did not examine investment banks or microfinance banks in this study. Also, not having access to databases does not allow them to include recent years in the study.Practical implicationsCEE commercial banks will likely keep fewer provisions or engage in under-provisioning when they face intense competition, and this can expose them to credit risk, which may threaten their stability.Originality/valueThis study is the first to investigate the effect of concentration and competition on income smoothing among CEE banks.

Firms Financial Inclusion and Export Performance: Evidence from Manufacturing Sector Firms in Pakistan

Financial inclusion of firms is crucial to create jobs, boost economic growth, and promote sustainable development. The study examines how financial inclusion affects enterprise export performance based on access to finance ratios. The study analyses the effects of firms’ financial inclusion determinants and macro environment factors on firms’ export values. The data comes from Pakistan’s manufacturing sector covering 400 firms listed on Pakistan Stock Exchange from 1999-2021. Driven by the nature of the data, the Method of Moment Quantile Regression is employed to assess the below and above mean regression estimations, and a two-step system GMM approach is used to address endogeneity concerns. The results of the study are robust against different specifications. The study reveals that assets positively impact a firm’s export performance, emphasising the importance of asset investment for foreign market competition. Asset tangibility negatively impacts export performance, except for low-gearing corporations, and fixed assets dominate. A balanced asset mix is crucial for improving exports. Debt-to-equity ratios, except for high-gearing firms, boost export performance, but domestic firms with high leverage ratios are more likely to fail. To avoid excessive leverage risks, firms must balance debt and equity. Diversifying the asset mix to include liquid and intellectual property can boost export success. Gearing affects export performance differently depending on a firm’s debt levels. Low-geared enterprises can leverage assets and debt to boost exports, while high-geared enterprises may be financially constrained and face challenges from excessive debt. Therefore, enterprises must carefully examine their gearing levels and make informed decisions on optimising their asset composition for optimal export performance. The study also opens up the possibility of further research on the role of exchange rates and firms’ investment in line with export performance.

Firms Financial Inclusion and Export Performance: Evidence from Manufacturing Sector Firms in Pakistan

Financial inclusion of firms is crucial to create jobs, boost economic growth, and promote sustainable development. The study examines how financial inclusion affects enterprise export performance based on access to finance ratios. The study analyses the effects of firms’ financial inclusion determinants and macro environment factors on firms’ export values. The data comes from Pakistan’s manufacturing sector covering 400 firms listed on Pakistan Stock Exchange from 1999-2021. Driven by the nature of the data, the Method of Moment Quantile Regression is employed to assess the below and above mean regression estimations, and a two-step system GMM approach is used to address endogeneity concerns. The results of the study are robust against different specifications. The study reveals that assets positively impact a firm’s export performance, emphasising the importance of asset investment for foreign market competition. Asset tangibility negatively impacts export performance, except for low-gearing corporations, and fixed assets dominate. A balanced asset mix is crucial for improving exports. Debt-to-equity ratios, except for high-gearing firms, boost export performance, but domestic firms with high leverage ratios are more likely to fail. To avoid excessive leverage risks, firms must balance debt and equity. Diversifying the asset mix to include liquid and intellectual property can boost export success. Gearing affects export performance differently depending on a firm’s debt levels. Low-geared enterprises can leverage assets and debt to boost exports, while high-geared enterprises may be financially constrained and face challenges from excessive debt. Therefore, enterprises must carefully examine their gearing levels and make informed decisions on optimising their asset composition for optimal export performance. The study also opens up the possibility of further research on the role of exchange rates and firms’ investment in line with export performance.

Ownership Structure and Capital Structure: Moderating Effect of Product Market Maturity

This study aims to analyze the impact of ownership structure on corporate capital structure, moderated by product market maturity. It employs a sample of 19950 firm-year observations for 1995 firms, which are listed companies on the A-Shares Board in Shanghai and Shenzhen stock exchange markets for the year 2011 to 2020. The data were analyzed using fixed effect regression. A two-step system GMM was used for the robustness test. Results suggested that state and institutional ownership negatively affect the firm’s leverage, which supports the resource-based theory. Furthermore, this study revealed that the negative effect of state ownership and institutional ownership on leverage diminished when firms are located in provinces with more matured product markets. These findings have important implications for the Chinese government in terms of developing and enforcing capital structure regulations to promote de-leverage.

Impact of R&D on Firm Performance: Do Ownership Structure and Product Market Competition Matter?

This study investigates how R&D affects firm performance and examines whether and how state ownership moderates the R&D–firm performance nexus. Moreover, this study investigates whether and how product market competition moderates the association between R&D and performance across the different natures of firms. Employing a sample of Chinese listed firms from 2000 to 2020, the study performs estimations by applying pooled ordinary least squares regressions, fixed-effect panel regressions, and a two-step system GMM model to account for endogeneity problems. The findings reveal that firm performance reduces as R&D expenses rise, with the impact being less pronounced for state-owned enterprises. The adverse impact of R&D on corporate performance is also alleviated under intense competition. The results have important implications for policymakers, investors, and corporations seeking to understand how R&D spending influences corporate performance in competitive industries. JEL classification: L25, G32, O3