Int. J. Financial Stud., Volume 10, Issue 2 (June 2022) – 24 articles

This study developed an investment framework to implement dynamic factor rotation strategies according to changes in economic conditions. I constructed a useful macro indicator that tracked real-time business cycles of the US economy and applied a trend-filtering method to the indicator to identify economic regimes based on the level and momentum change. I found that historical performance of individual equity factors greatly differed across economic regimes, and this heterogeneity can be exploited to build dynamic factor rotation strategies by shifting exposures toward effective factors according to the different regimes. The out-of-sample analysis showed that the regime-based dynamic approach outperformed the static benchmark in terms of absolute and risk-adjusted returns after accounting for transaction costs. The results have important implications for many pension funds and for institutional investors interested in factor investing and seeking to improve the long-term portfolio performance. Full article

According to the U.S. Census records, 40% of the population is aged between 35 and 64. This statistic means that a substantial percentage of the nation’s population is in the wealth-formation phase of their life cycle and should be saving towards their retirement goals. Hence, the demand for retirement planning is anticipated to increase over the next decade. However, many economists and policymakers are concerned that a substantial number of American households are not well prepared for retirement. The Retirement Confidence Survey of the Employee Benefit Research Institute found that 36% of workers do not have any retirement savings. In particular, Generation X is the cohort that is least prepared for retirement. This research focuses on Generation X (40–54 years old) and explores this cohort’s retirement preparedness relative to their Baby Boomer and Millennial peers. The study also models cohort effects and identifies the key factors affecting retirement preparedness. The result indicates that Generation X is better prepared for retirement than Millennials in safer portfolio allocations, but there is no significant difference in retirement adequacy between Gen Xers and Baby Boomers. Income, risk tolerance, and attainment of a college education are positively associated with retirement preparedness. Full article

There is evidence that ICT developments can improve bank efficiency and performance. Previous studies often employ data envelopment analysis (DEA) to first examine bank performance and then use a second-stage regression to explain the influences of other environmental factors, including ICT, on such efficiency. Since DEA efficiency scores are bounded between the (0, 1] intervals, Tobit and truncated regressions are commonly used in this stage. However, none has accounted for the skewness characteristic of DEA efficiency. This paper applied a bootstrap-censored quantile regression (BCQR) approach to triply account for the issues of a small sample (via bootstrap), bounded intervals (via censored regression), and skewness (via quantile regression) in DEA analysis. We empirically examined the efficiency and performance of 27 Vietnamese commercial banks in the 2007–2019 period. The efficiency scores derived from our first stage revealed that they are skewed and thus, justify the use of the BCQR in the second stage. The BCQR results further confirmed that ICT developments could enhance bank efficiency, which supports the recent policy to restructure the Vietnamese banking sector toward innovation and digitalization. We also examined the impacts of other factors such as bank ownership, credit risk, and bank size on efficiency. Full article

This article studied the factors affecting the time taken for annual report submission through an analysis of 654 non-financial listed companies on the Vietnamese stock market from 2016 to 2020. Data collected were processed by using fixed-effect models (FEM), random effect models (REM), adjusted REM, and general least square (GLS) to ensure the validity of research results. The main objective of this paper was to explore the effects of independent variables including retained earnings (RETA), earnings before interest and tax (EBITTA), liquidity (WCTA), capital structure (BVETD), bankruptcy risk (ZSCORE), size (SIZE), number of years in business (AGE), characteristics of financial reports (CONSO), and type of audit firm (AUDIT) on the number of days for publication annual reports (TIME). The results obtained from the adjusted-REM and GLS regression showed that retained earnings, firm age, and firm size have positive effects on time for disclosure annual reports, whereas earnings before interest and tax and audit firm type have negative effects. In addition, the results showed that working capital, capital structure, feature of consolidated reports, and bankruptcy risk have no significant effects on time to publish annual reports. Full article

The COVID-19 pandemic is damaging economies across the world, including financial markets and institutions in all possible dimensions. For banks in particular, the pandemic generates multifaceted crises. This is likely to be worse in developing economies with poor financial market architecture. Innovation is considered an important factor in organizational effectiveness and competitive advantage post-COVID-19. Understanding how the banking system can improve their innovation capabilities is an unsolved question, especially in an emerging economy. Hence, this paper aims to examine the impact of capital budgeting, knowledge management, and business strategy on innovation capabilities in the Vietnamese banking sector post-COVID-19. More specifically, this study investigates the moderating role of corporate governance in strengthening these proposed impacts. This research uses a sample of 23 listed banks in Vietnam to examine the moderating role of corporate governance in the context of an emerging country. Hierarchical regression analysis and the multiple indicator approach are employed. The results indicate that knowledge management and business strategy significantly impact innovation capabilities while capital budgeting has no effect. Corporate governance has been revealed as the moderator of the relationship between two factors (knowledge management and business strategy) and innovation capabilities. Full article

This study examines the relationship between politically connected independent commissioners and independent directors regarding the cost of debt. The sample is all companies listed on the Indonesia Stock Exchange for the 2010–2017 period, totaling 327 companies with a total data value of 1722 firm-year observations. We used the ordinary least squares regression model (OLS) and the Heckman 2SLS method to solve the endogeneity problem. We found that politically connected independent commissioners and politically connected independent directors negatively correlate with the cost of debt. These results indicate the importance of politically connected independent commissioners and independent directors in managing companies, especially in obtaining loans with low interest rates. In addition, our results are robust due to the use of the Heckman 2SLS test. Therefore, this research can contribute to the development of the literature related to corporate governance and political connections in public companies, so that politically connected independent commissioners and independent directors have an essential role in decision-making in companies. Full article

This study explored how corporate social responsibility (CSR) risk, social networks, and firm performance interacted in light of resource dependence theory and information asymmetry theory to bridge the literature gap between CSR risk and firm performance under the conditions of China’s network. We used data from Shanghai and Shenzhen A-share listed firms in China from 2010 to 2019 to conduct a social network analysis and random-effects GLS regression analysis. The study revealed the following: (1) CSR risk hurts financial performance, while structural holes and network density attenuate this effect; (2) CSR risk positively impacts capital performance, which is amplified by closeness centrality; (3) CSR risk harms innovation performance, while betweenness centrality and network density mitigate this effect. Despite CSR risk bringing short-term benefits, this effect is not sustained. Generally, CSR risks are more detrimental to firms than beneficial. In this study, we strengthen the basis of the research on CSR risk and firm performance, along with research on social networks, advising firms to avoid CSR risks and utilize their networks to mitigate such risks and achieve a better performance. Full article

Turkey’s e-commerce market is rapidly expanding, and the country is ranked first in the world in monthly mobile purchases. The purpose of this study is to determine the factors that influence the adoption of online payments systems among the customers of a Turkish bank during the COVID-19 pandemic. The research model extends the technology acceptance model (TAM) by further examining the impact of 11 factors on attitude, behavioral intention and actual usage. The results suggest a strong influence of these factors on attitude and behavioral intention. Relative advantage, perceived trust, perceived usefulness, personal innovativeness, perceived integrity, perceived ease of use, health and epidemic effects, income, private sector employment and self-employment all have a positive effect on actual online payment system usage. However, perceived risk and age have a negative impact on the actual online payment system usage. Full article

In this paper, we propose a new exogenous model to address the problem of negative interest rates that preserves the analytical tractability of the original Cox–Ingersoll–Ross (CIR) model with a perfect fit to the observed term-structure. We use the difference between two independent CIR processes and apply the deterministic-shift extension technique. To allow for a fast calibration to the market swaption surface, we apply the Gram–Charlier expansion to calculate the swaption prices in our model. We run several numerical tests to demonstrate the strengths of this model by using Monte-Carlo techniques. In particular, the model produces close Bermudan swaption prices compared to Bloomberg’s Hull–White one-factor model. Moreover, it finds constant maturity swap (CMS) rates very close to Bloomberg’s CMS rates. Full article

This study investigated four factors affecting internal audit effectiveness in Vietnam, namely, independence of internal audit, the competence of internal auditors, management support for internal audit, and quality of internal audit work. Quantitative and qualitative evaluations were conducted, including a logistics regression model and other analyses, using SPSS software. Through semi-structured in-depth interviews and an online survey, 144 responses were obtained from internal Vietnamese auditors of nonfinancial companies listed on the Vietnamese stock market in 2021. After processing the data, the results revealed two factors (independence of internal auditor and management support for internal audit) with a positive influence on internal audit effectiveness, whereas the competence of internal auditors and quality of internal audit work did not affect internal audit effectiveness. Full article

The present study investigates a conceptual research framework on financial literacy in various investment planning and decision-making stages. The study comprises a review of 2182 articles published in peer-reviewed journals from 2001 to 2022 (January). The study employed bibliometric techniques such as citation network analysis, co-citation analysis, content analysis, publication trends, and keyword analysis to analyze the literature on financial literacy. The study aims to add to the literature on financial literacy by proposing ten clusters to improve research on financial literacy in order to help investors learn better. Financial literacy has evolved from a fledgling discipline to a significant teaching and research tool. Therefore, it is vital to investigate and identify current research trends in this field. The results are essential to the financial community, given that institutions and society are increasingly emphasizing financial literacy to strengthen individual citizens’ responsibilities in designing their investment strategies. Full article

This paper examines the relationship between generational differences, risk tolerance, and attitudes towards financial investments in a nationally representative sample from the United States of America. The sample consists of pooled cross-sectional data of three waves (2012–2018) and 80,000 observations from the National Financial Capability Study (NFCS). Using a probit model (with and without sample selection), all of the predictor variables are estimated to have statistically significant effects on the ownership of financial securities, with the expected sign effects. There is clearly a generational cohort effect, whereby Baby Boomers are on average more likely to own financial investments than Millennials, controlling for other factors such as incomes, education, and financial literacy. Generation Xers are statistically less likely to have investments in financial securities compared to Millennials. In general, Baby Boomers are more risk-averse and Generation Xers are more risk-loving than Millennials, accounting for education and income levels. The paper reveals a conundrum in which Baby Boomers (Gen Xers), although more (less) risk-averse, are more (less) likely to own financial securities. We control for reverse causality (endogeneity) in the relationship between risk tolerance and the ownership of securities, using the bivariate probit model. The level of financial knowledge of respondents correlates highly with asset ownership: individuals with high and medium levels of financial knowledge are more likely to own financial assets than those with low levels of financial knowledge. To address the limitations of the current findings with regard to generational attitudes towards financial investments, further research is recommended. Full article

This study examines the relationship between corporate managers’ political ideology and corporate leverage policies conditional on investor sentiment. Based on a minimum of 21,884 observations over the 1992–2008 period, the authors show that Republican managers significantly reduce leverage during periods of high investor sentiment. To the best of the authors’ knowledge, this paper is the first to document that Republican managers are not swayed by the general tendency to increase leverage in high-sentiment periods. Overall, the empirical evidence from this study indicates that personal characteristics of managers have a consistent impact on corporate policies, providing support for the “behavioral consistency” theory. Further, the results of this study imply that internal and external stakeholders of a corporation should take into account manager personality in their decisions. For example, the board of a highly indebted company may consider hiring a conservative manager to reduce its financial risk. Full article

Since the adoption of the SEC’s Rule 10b-21 in 1988, many researchers have been concerned over the effectiveness of short sales constraints in preventing manipulative trading in the derivatives market. We analyze whether options can be used as synthetic short sale instruments to manipulate stock prices before a seasoned equity offer. Due to the existence of strict short sales constraints in the equity market and market makers’ anticipation of manipulative trading, it would be very costly for a manipulator to drive stock prices down artificially either by short selling in the equity market or by using synthetic short sales in the options market. Using a sample of 237 firms that issued SEOs on the NYSE and had options listed on any U.S. options exchange from April 2002 to December 2004, we show that potential manipulators in the options market tend to use put options as a trading vehicle during the SEO’s pre-offer period. The results of our empirical tests support the predictions of our model. Full article

This study explores the effect of corporate governance on financial innovation and the effect of financial innovation on performance in Taiwan’s banking industry from 2011 to 2019. The results find that the banks have higher shareholding of institutional investors, ratio of independent directors, attendance rate of directors, average education level of directors and more directors with a financial or accounting background, the greater innovative financial services offered by banks. After 2015, the impact of corporate governance on banks’ innovative financial services has increased. Moreover, the greater financial innovation services, the higher the bank profitability and value, especially after 2015. Finally, offering more innovative financial services can enhance the value of financial-holding subsidiary banks; by contrast, doing the same might negatively affect the profitability of nonfinancial-holding banks. Full article

This paper explores the role of social capital in contributing to the success of a new breed of organizations known as ‘blank check companies’ or special purpose acquisition companies (SPACs) that are set up solely to target and acquire listed companies as a fast-track route to gain listing status in the stock market. The paper is a case study of Pershing Square Holdings Ltd., St. Peter Port, UK (PSH), which launched SPAC IPOs (Initial Public Offerings), Pershing Square Tontine Holdings Ltd., New York, NY, USA (PSTH), which succeeded in raising the largest capital from influential investors in 2020. Social capital theory is employed to provide theoretical structure for the analysis. Using annual reports, publicly available information on the internet, as well as social media platforms related to the company and its strategy, the authors critically analyse and highlight how the Tontine’s founder and his team utilized their structural, relational, and cognitive social capital to attract investors and gained recognition as the most successful SPAC IPO in the market in 2020. The authors found the ability to structure a SPAC IPO that departs from a typical SPAC, and the choice of timing to enter the SPAC market resulted in an over subscription and higher market valuation ratings of its IPO, as well as allowed the sponsor to be selective of its investors. This is the first study to address the significance of social capital at the individual and organizational level in creating value for SPAC IPOs. Potential investors can gain understanding and insights on the mechanics of SPAC IPOs and the importance of the founder’s social capital in ensuring successful investment. Successful SPAC IPOs will create interest in the marketplace and enhance the value of investment for investors and helped private companies to get listed faster. Full article

In response to relatively little evidence on the determinants of the financial distress in cooperative financial institutions (e.g., Credit Unions), this paper proposes a distress indicator of Merton Distance to default (Merton DD), which was constructed with a z-score, possessed improved predictive capability, but reducing equity volatility. This model possesses the advantages of both hazard and modified Merton DD model, which could timely reflect market volatility and predict when distress would occur. As a demonstration, we applied this model to forecast the financial distress of credit unions in Taiwan. The results can provide more information to researchers. Full article

The aim of this paper is to find a dynamic framework of analysis of credit union movements by grouping credit unions into different category types. Within the heterogeneous reality of the worldwide credit union movement, the typology provides a clearer understanding of the dynamics of change and development. We use panel-ordered logistic regression to find the key covariates of influence when analyzing the original typology to add further explanation of the development of credit union movements. By using transnational research, we revisit each of the three categories of the original typology to re-evaluate and expand upon the relevance of this particular model. We also include the elements of economy, society, education, and culture in other countries in this research. Our findings suggest that the stage of development of the credit union movement depends on the variables of asset scale, financial crisis, legislative framework, economy, society, and culture of the country. In addition, they indicate that the penetration rate of the credit union movement depends on the asset scale, loan ratio, credit union growth, financial crisis, economy, society, education, and culture of the country. This lends support to the recognition of the diversity of the credit unions’ development. Full article

This paper investigates the robustness of the conventional mean-variance (MV) optimization model by making two adjustments within the MV formulation. First, the portfolio selection based on a behavioral decision-making theory that encapsulates the MV statistics and investors psychology. The second aspect involves capturing the portfolio asset dependence structure through copula. Using the behavioral MV (BMV) and the copula behavioral MV (CBMV), the results show that stocks with lower behavioral scores outperform counterpart portfolios with higher behavioral scores. On the other hand, in the Forex market, the reverse is observed for the BMV approach, while the CBMV remains consistent. Full article

During the past two decades, financial markets across the globe have experienced sporadic waves of crashes. Such waves raise concerns about the vulnerability of global financial markets and the transmission mechanisms of shocks beyond borders. The current study examines the co-movement of stock markets in BRICS (Brazil, Russia, India, China and South Africa) countries and the United States of America (US). It unfolds their exposure to contagion effects during the major financial crises, which have flared up since 2000. Daily close price indices of selected stock markets were used in this endeavour. These data spanned from 5 January 2000 to 10 March 2021. A wavelet decomposition on stock return series was performed on these data to determine the multihorizon nature of comovement (pure contagion or interdependence) and the dynamics of market integration. It emerges that before the 2006-US-housing-bubble and after the 2011/13-EU-sovereign-debt crises, some shocks caused pure contagion. Such transmission generated short-term shocks. Most of the earlier shocks, particularly the US subprime and the EU Sovereign Debt crises, were spread via interdependence. Trade linkages and economic integration improvements enhanced such interdependence. In addition, when analysing the episodes of market integration, it arises that, in general, the short- and long-term integration strengthened and deepened comovement among equity markets. From the portfolio diversification and risk management perspectives, these results indicate that the market in China provided lucrative grounds for short-run investors from the other countries covered in the current study. These results can be helpful for investors interested in portfolio diversification in the BRICS region. They might also help policymakers in the region mitigate the exposure to external shocks of markets. Full article

Cultural distance (CD) is an important driver of foreign expansion strategy at the firm level. However, its effects can be more or less significant depending on the contextual characteristics of the host country, such as the quality of formal institutions and the openness to international trade. Therefore, it is argued that strong formal institutions in the host country can effectively reduce the adverse impact of CD. Additionally, due to the more frequent interactions with foreign cultures, countries open to foreign trade can positively accommodate the effects of CD. The study tests these assumptions using data from the Orbis database and the World Bank and finds a reduction in the adverse impact of CD on the financial performance of foreign subsidiary firms with robust formal institutions in the host country. Moreover, the negative effects of CD increase with higher degrees of trade openness. Thus, the results indicate that foreign subsidiary firms operating in host countries that are more open to foreign trade will have to conform to the higher expectations from the local culture. Full article

We analyze the interaction between management and investors during Chinese IPO roadshows through Jaccard Similarity analysis of written Chinese logograms. We provide evidence that when agreement is high, investor optimism increases, leading to relatively large first-day underpricing. We further show that high agreement biases investors to systematically overestimate IPO prospects leading to poor long-run abnormal performance. Jaccard Similarity is different from current content analysis methodologies because it is language and culture agnostic, requiring no a priori construction of thematic dictionaries. Elimination of such dictionaries removes the danger that the researcher has imposed predispositions upon the study. Full article

This paper attempted to apply an EVT-based pairwise copula method for modelling risk interaction between foreign exchange rates and equity indices of the Johannesburg Stock Exchange (JSE) and to model the dependence structure of the underlying assets with some selected listed stock indices. We filtered the return residuals using the stochastic volatility and GJR-GARCH (1,1) models with different distributions, and we selected the best-fitted model in the GARCH framework. We applied the peaks-over-threshold (POT) method to the filtered residuals to fit it by the generalised Pareto distribution (GPD), and we used the vine copula to model the co-movement between foreign exchange rates and equity indices and value at risk (VaR) for risk quantification. We used three exchange rates (USD, GDP, and EUR) against the South African rand (ZAR) and six industry indices (banking, life insurance, non-life insurance, leisure, telecommunications, and mining). Our empirical findings show that the GJR-GARCH with Student’s t-distribution, combined with a regular (R)-vine copula, outperforms the alternatives models. Dependence structure analysis reveals a strong co-dependency between the stock from the financial industry and foreign exchange rates. The results also show that VaR-based R-vine copula outperforms the model compared to VaR-based D-vine and C-vine before the COVID-19 outbreak, while the D-vine copula produced appears to be the most suitable risk model specification for quantifying risk during the COVID-19 pandemic. Therefore, VaR-based R-vine copula is suitable for risk quantification, while GJR-GARCH with Student’s t-distribution produces better results in the GARCH framework. Further, we find that equity indices and foreign exchange rates exhibit higher tail risk contagion during the COVID-19 pandemic, with the non-life-insurance and telecommunications sectors appearing to be the investor’s safe haven among the listed sectors of the JSE. Our results will help South African investors seek risk-adjusted returns to substantially reduce the hedging cost of potential loss due to the misspecification of a risk model and make an investment decision during the global health crisis. Full article

This paper develops a formula to numerically estimate the unsubsidized, fair-market value of the toxic assets purchased with Federal Reserve loans. It finds that subsidy rates on these loans were on average 33.9 percent at origination. In contrast, by the 3rd quarter of the 2010, there was on average no subsidy in TALF loans. The theoretical model is used to predict the early redemption of Term Asset-Backed Securities Loan Facility (TALF) loans used to purchase commercial mortgage-backed securities (CMBS). The predictions of the model are strongly supported by the data. In addition, this paper looks at the determinants of early redemption. CMBS originated inside the peak bubble years of 2005–2007 were much less likely to be redeemed early. The giant investment managers, Blackrock and PIMCO, were much more likely to redeem their TALF loans early than smaller investment managers. Full article