Issue #1 (Volume 14 2017)

In this research, the authors proposed a new method to evaluate borrowers’ credit risk and quality of financial statements information provided. They use qualitative and quantitative criteria to measure the quality and the reliability of its credit customers. Under this statement, the authors evaluate 35 features that are empirically utilized for forecasting the borrowers’ credit behavior of a Greek Bank. These features are initially selected according to universally accepted criteria. A set of historical data was collected and an extensive data analysis is performed by using non parametric models. Our analysis revealed that building simplified model by using only three out of the thirty five initially selected features one can achieve the same or slightly better forecasting accuracy when compared to the one achieved by the model uses all the initial features. Also, experimentally verified claim that universally accepted criteria can’t be globally used to achieve optimal results is discussed.

This paper aims to discuss the concepts and methodological issues of enterprise risk management (ERM). The case study of company A shows that ERM has been implemented and integrated with management control as a means of monitoring its subsidiaries. First, ERM system was implemented through comprehensive review of corporate risk policies, risk management processes, roles and responsibilities, and risk culture. Second, company A integrated ERM with the existing management control system in order to evaluate the risk underlying the current management activities. Finally, ERM implementation was expanded to all subsidiaries so that each business unit would be delegated for its own risk management. This paper provides insight on the process how group-level internal auditors can use ERM as a tool to manage risk of subsidiaries, thereby filling the gap between academic research and practice. This successful ERM adoption case can be used as a guideline for other organizations, which plan to adopt ERM with reduced costs and improved processes.

Buy and hold strategies make staying disciplined difficult for investors, especially given the variability of returns for different asset classes/strategies during divergent market conditions. Market timing strategies, on the other hand, present significant theoretical benefits, but in reality these benefits are difficult to obtain. Tactical asset allocation, where limited deviations from the strategic allocation are allowed permits the portfolio manager to take advantage of market conditions fits between these two extremes. The authors correlate daily returns for each of eighteen separate asset classes typically used in diversified institutional portfolios and daily closing values of the VIX (the ticker symbol for the Chicago Board Options Exchange Volatility Index). This information is used to select those classes whose returns are most responsive to the level of the VIX. Portfolio allocations for eight selected asset classes are revised depending on the level of the VIX at the daily close of the market. The portfolio is rebalanced on the business day following the day the VIX hits the trigger value. The VIX tactical allocation overlay yields an increase in return over the buy and hold portfolio of approximately 38 basis points. The authors conclude that the tactical asset allocation strategy based on the level of VIX provides a higher return than the neutral buy and hold allocation with a higher Sharpe ratio and lower volatility.

This study focuses on South African listed companies and investigates the relation between Big 4 auditing companies, earnings management and earnings conservatism. It shows that companies audited by a Big 4 auditor leads to a more timely recognition of large losses and to lower levels of earnings manipulation and higher conditional conservatism. The findings report that the conditional form of conservatism is negatively related to unconditional conservatism. Higher conservatism is also reported for firms with high leverage and those that convey bad news. The opposite has been found for firms with high growth. The findings, in general support the notion that the new Companies’ Act in South Africa and the King III are effective corporate governance tools and the observed cases of corporate failure may be due to other factors, including management hubris.

Estimation of systematic risk is one of the important aspects of the best investment decisions. Through systematic risk prediction will be known risks to be faced by investors, because systematic risk is a measure of investment risk. In addition to returns, investors always consider the risk of investment, because investors are rational individuals, ie individuals who always consider the trade-off between return and risk. At a certain level of return, investors will tend to choose investments with the lowest risk level. Conversely, at a certain level of risk, investors tend to choose investments with the highest return rate. The purpose of this paper is to analyze the influence of the financial information on the systematic risk of stock manufacturing companies listed on the Indonesia Stock Exchange over a period of five years from January 2011 to December 2015. The financial information is measured in four accounting variables, i.e. financial leverage, liquidity, profitability, and firm size. The results of data analysis using multiple linear regression method to prove that at the 0.05 level only variable sized companies that significantly influence systematic risk. Meanwhile, the variable financial leverage, liquidity, and profitability does not affect the systematic risk. The results showed inconsistencies with the results of several previous studies. This inconsistency may be due to measurement problems variable accounting, the implementation period of the study, and the use of different research samples.

Jordanian banks traditionally use a set of indicators, based on their internal explicit knowledge to examine the credit risk caused by default loans of individual borrowers. The banks are reliant on the personal and financial information of the borrowers, obtained by knowing them, often referred as internal explicit knowledge. Internal explicit knowledge characterizes both financial and non-financial indicators of individual borrowers, such as; loan amount, educational level, occupation, income, marital status, age, and gender. The authors studied 2755 default or non-performing personal loan profiles obtained from Jordanian Banks over a period of 1999 to 2014. The results show that low earning unemployed borrowers are very likely to default and contribute to non-performing loans by increasing the chances of credit risk. In addition, it is found that the unmarried, younger borrowers and moderate loan amount increase the probability of non-performing loans. On the contrary, borrowers employed in private sector and at least educated to a degree level are most likely to mitigate the credit risk. The study suggests improving the decision making process of Jordanian banks by making it more quantitative and dependable, instead of using only subjective or judgemental based understanding of borrowers.

Using a European dataset of 478 delistings, the authors investigate the role of corporate governance in the short-term performance of European stocks around a delisting decision. In order to achieve this, the authors utilize the event study methodology in multiple contexts and cross-sectional regression analysis. This is particularly evident in high shareholder protection environments in a finding, related with investors’ perception of the security they experience in the particular market, as well as the afterlife of the under delisting stock and the potential of value creation or destruction. In high investor protection environments the delisting event causes negative abnormal returns both for voluntary and involuntary delistings. The authors conjecture that these delistings, whether referring to LBOs, delistings from secondary listings or BOSOs, are strategic decisions, and in this respect pre-delisting shareholders acknowledge that there is life after delisting. Under low investor protection the above holds only for involuntary ones. Companies failing to meet capital market criteria and voluntary delistings appear to have significantly smaller losses than under bankruptcy firms, on average, on the eve of the delisting event. These abnormal returns are basically affected by the firms’ financial soundness and the corporate governance level pertaining in the host market. Cross-sectional regression analysis shows also the inverse relationship between the degree of governance structures and market reaction to delistings announcements.

Working capital plays a vital role in shareholders’ wealth creation, yet there is a dearth of empirical studies on the relationship between working capital management and firm value in the South African economic environment. This study attempts to fill this gap by using Richards and Laughlin’s (1980) Cash Conversion Cycle theory to investigate the impact of working capital management efficiency and its separate components on firm value of South African firms listed on the Johannesburg Stock Exchange (JSE). Panel data regression methodology was used to analyze accounting data obtained from I-Net Bridge/BFA McGregor for 75 firms for the 10 year period, 2003 to 2012, to determine the nexus between WCM and profitability (proxied by return on assets). The key findings of the study are as follows: 1) there exists a significant positive relationship between firm value and both inventory conversion period and receivables conversion period; 2) the relationship between the cash conversion cycle and firm value is positive but insignificant; 3) there is a significant positive relationship between accounts payable deferral period (PDP) and profitability; 4) firm size and firm value are significantly positively related, and 5) there is a significant negative relationship between leverage and firm value.

This study intends to investigate whether stock returns affect the consumer sentiment. In particular, socially responsible companies are incorporated in the sample in order to capture the specification of socially responsible investors. For this reason, the University of Michigan Consumer Confidence Index is used as a proxy for consumer confidence, while data from Dow Jones Sustainability Index US is employed as a proxy for socially responsible companies for the period 1999-2016. The generalized autoregressive conditional heteroskedasticity model applied and illustrated that stock returns affect positively the consumer confidence. The result has important implications for investors and policy makers.

Investment analysis is a crucial process for any investment’s success. This process can be supported by both the discounted cash flow analysis and the real options analysis. Many researchers have point out restrictions for the first one, in cases of uncertainty in the entrepreneurial environment. The main types of uncertainty, concerning the wind energy sector, include uncertainties related to the price of electriticity by RES, the public policy regulatory policies, the demand, the initial capital costs, the technological progress, the weather conditions, the political and economical situations and generally the RES market structure. In this paper, we try to find the optimal investment strategy in a liberalized global electricity market, where the price of electricity is uncertain while the other parameters are configured separately in each country. The authors consider about the factors of the time for investment and the electricity’s price level, in wind energy by using the real options theory. The authors select a variety of data for the wind energy industry from different countries in several continents, and also create a model for the investment analysis in this entrepreneurial sector.

This paper is a comprehensive investigation of calendar anomalies in the Ukrainian stock market. It employs various statistical techniques (average analysis, Student’s t-test, ANOVA, the Kruskal-Wallis test, and regression analysis with dummy variables) and a trading simulation approach to test for the presence of the following anomalies: day-of-the-week effect; turn-of-the-month effect; turn-of-the-year effect; month-of-the-year effect; January effect; holiday effect; Halloween effect. The results suggest that in general calendar anomalies are not present in the Ukrainian stock market, but there are a few exceptions, i.e. the turn-of-the-year and Halloween effect for the PFTS index, and the month-of-the-year effect for UX futures. However, the trading simulation analysis shows that only trading strategies based on the turn-of-the-year effect for the PFTS index and the month-of-the-year effect for the UX futures can generate exploitable profit opportunities that can be interpreted as evidence against market efficiency.

A firm’s capital structure decisions constitute an essential research topic academically and practically. In this study, the author uses the data of US listed firms to test the traditional trade-off theory of capital structure, which posits that firms should balance the benefit of tax shields and costs of financial distress to purse an optimal debt ratio. Therefore, to determine the complex relationship between firm value and debt ratio and avoid the problem of model misspecification, the author adopts the non-parametric fixed effect model and semi-parametric (partially linear) fixed effect model. Our empirical results reveal that a nonlinear and asymmetric relationship exists between firm value and market debt ratio, thus, considerably supporting trade-off theory. Moreover, the use of different definitions of key variables and various kernel functions engenders robust results. Overall, the author suggests that firm managers should employ financial leverages appropriately to maximize firm value.

The article studies the parameters of the accumulative pension system, particularly, the rate of contribution into the accumulative system, contribution period of the system’s participants, the coefficient of replacement of the salary with pension after the retirement, the number of years of the future pension payments, alternatives of profitability of the funds accumulated by the system. The structure of the accumulative system is based on the methods and models of determining the parameters during the period of accumulation of resources after the retirement of the participant. The calculations are based on a variant basis. There are 6 interconnected parameters of the system’s determination. The author has carried out formalization of determining the system’s indicators and variant calculations. The most realistic for Ukraine is the introduction of accumulative system with the following parameters: contribution ‒ 14% of salary (or preferably of income); contribution period ‒ 35 years with the retirement of men at the age of 65 and women at the age of 60; the percentage of return on the savings ‒ 3%. That is, in this case, the accumulation system will provide a pension with the income-replacement ratio of 0.6 over 18.4 years.

The model can be used at the state level (when determining the rate of contribution into the accumulation system, the contribution period and the income-replacement ratio with the fixation of other parameters) and by the system’s participants (when determining the number of years using the accumulated pension, the income-replacement ratio and monitoring one’s own resources).

Islamic finance has faced a two-fold criticism from scholars; viz. constructive criticism and destructive criticism. Majority of the scholars criticize it with the intention to improve its overall development, but some scholars are more negative in their criticism. This paper proposes that Islamic banks (a component of Islamic finance) are not charitable institutions, but are the intermediary institutions that take care of investors’ expectations to keep the time value and return to their investments intact with the market fluctuations. The purpose of this paper is to provide better insight about Islamic finance so as to further improve this industry to achieve its long term goals and serve the society better. The paper also attempts to answer some of the common allegations imposed by scholars towards Islamic finance.