Int. J. Financial Stud., Volume 3, Issue 3 (September 2015) – 12 articles , Pages 177-430

This Guest Editor’s note reflects on the contributions of each article in the Special Issue on family firms’ behavior and performance. Building on this, several under-researched areas concerning family involvement in businesses are identified and the resulting impact on firm behavior and performance is explained. Finally, future research directions and insights for practitioners are outlined. Full article

Risk management is one of the most important branches of business and finance. Classification models are the most popular and widely used analytical group of data mining approaches that can greatly help financial decision makers and managers to tackle credit risk problems. However, the literature clearly indicates that, despite proposing numerous classification models, credit scoring is often a difficult task. On the other hand, there is no universal credit-scoring model in the literature that can be accurately and explanatorily used in all circumstances. Therefore, the research for improving the efficiency of credit-scoring models has never stopped. In this paper, a hybrid soft intelligent classification model is proposed for credit-scoring problems. In the proposed model, the unique advantages of the soft computing techniques are used in order to modify the performance of the traditional artificial neural networks in credit scoring. Empirical results of Australian credit card data classifications indicate that the proposed hybrid model outperforms its components, and also other classification models presented for credit scoring. Therefore, the proposed model can be considered as an appropriate alternative tool for binary decision making in business and finance, especially in high uncertainty conditions. Full article

The study aims at examining how fiscal deficits affect the performance of the stock market in India by using annual data from 1988–2012. The study makes use of Ng-Perron unit root tests to check the non-stationarity property of the series; the Auto Regressive Distributed Lag (ARDL) bounds test and a Vector Error Correction Model (VECM) for testing both short and long run dynamic relationships. The variance decomposition (VDC) is used to predict the exogenous shocks of the variables. The findings of the bounds test reveal that the estimated equation and the series are co-integrated. The ARDL results suggest a long run negative relationship exists between budget deficit and stock prices and do not show any significant relationship in the short run. The VECM result shows that fiscal deficits influence the stock price only in the short run. The results of the Variance Decomposition show that stock price movement in the long run is mostly explained by shocks of fiscal deficits. The study implies that the government must adopt appropriate macroeconomic policies to reduce budget deficit, which will result in stock market growth and in turn will lead to the financial development of the country. Full article

The paper provides probability estimates of the state of the GDP growth. A regime-switching model defines the probability of the Greek GDP being in boom or recession. Then probit models extract the predictive information of a set of explanatory (economic and financial) variables regarding the state of the GDP growth. A contemporaneous, as well as a lagged, relationship between the explanatory variables and the state of the GDP growth is conducted. The mean absolute distance (MAD) between the probability of not being in recession and the probability estimated by the probit model is the function that evaluates the performance of the models. The probit model with the industrial production index and the realized volatility as the explanatory variables has the lowest MAD value of 6.43% (7.94%) in the contemporaneous (lagged) relationship. Full article

Financial disasters to hedge funds, bank trading departments and individual speculative traders and investors seem to always occur because of non-diversification in all possible scenarios, being overbet and being hit by a bad scenario. Black swans are the worst type of bad scenario: unexpected and extreme. The Swiss National Bank decision on 15 January 2015 to abandon the 1.20 peg against the Euro was a tremendous blow for many Swiss exporters, but also Swiss and international investors, hedge funds, global macro funds, banks, as well as the Swiss central bank. In this paper, we discuss the causes for this action, the money losers and the few winners, what it means for Switzerland, Europe and the rest of the world, what kinds of trades were lost and how they have been prevented. Full article

This paper applies demand and supply analysis to examine the government bond yield in Spain. The sample ranges from 1999.Q1 to 2014.Q2. The EGARCH model is employed in empirical work. The Spanish government bond yield is positively associated with the government debt/GDP ratio, the short-term Treasury bill rate, the expected inflation rate, the U.S. 10 year government bond yield and a dummy variable representing the debt crisis and negatively affected by the GDP growth rate and the expected nominal effective exchange rate. Full article

The Baker and Wurgler (2006) sentiment index purports to measure irrational investor sentiment, while the University of Michigan Consumer Sentiment Index is designed to largely reflect fundamentals. Removing this fundamental component from the Baker and Wurgler index creates an index of investor sentiment that may better capture irrational sentiment. This new index predicts returns better than the original Baker and Wurgler index as well as the alternative Baker and Wurgler sentiment index. Full article

The Markov Tree model is a discrete-time option pricing model that accounts for short-term memory of the underlying asset. In this work, we compare the empirical performance of the Markov Tree model against that of the Black-Scholes model and Heston’s stochastic volatility model. Leveraging a total of five years of individual equity and index option data, and using three new methods for fitting the Markov Tree model, we find that the Markov Tree model makes smaller out-of-sample hedging errors than competing models. This comparison includes versions of Markov Tree and Black-Scholes models in which volatilities are strike- and maturity-dependent. Visualizing the errors over time, we find that the Markov Tree model yields more accurate and less risky single instrument hedges than Heston’s stochastic volatility model. A statistical resampling method indicates that the Markov Tree model’s superior hedging performance is due to its robustness with respect to noise in option data. Full article

This paper draws on network theory to investigate European banks’ sovereign debt exposures. Banks’ holdings of sovereign debt build a network of financial linkages with European countries that exhibits a long-tail distribution of node degrees. A highly connected network core of 15 banks is identified. These banks accounted for the majority of sovereign debt investments between December 2010 and December 2013 but exhibited only average and sometimes even below average capitalizations. Consequently, they constituted a potential source and transmission channel of systemic risk, especially due to their proneness to portfolio contagion. In a complementary regression analysis, the effect of counterparty risk on Credit Default Swap (CDS) spreads of 15 EU sovereigns is investigated. Among the banks exposed to the debt of a particular issuer, the biggest institutions in terms of their own asset sizes are identified and some of their balance sheet characteristics included into the regression. The analysis finds that the banks’ implied volatilities had a significant and increasing effect on CDS spreads during the recent crisis years, providing evidence of the presence of counterparty risk and its effect on EU sovereign debt pricing. Furthermore, the role of the domestic financial sectors is assessed and found to have affected the CDS spreads. Full article

Many companies in recent years are seeking new ways to manage their debt liabilities. Companies with outstanding debt securities can engage in a variety of transactions with bond holders. Choices will depend to some extent on whether or not the company has access to cash and is able to purchase in the open market or through cash tender offer, or if without cash, by making an exchange offer of new securities for existing securities. Often in either case, there is a bond indenture consent solicitation needed to waive or amend existing bond terms, the announcement of which signals management’s intent to the market. Given the increasing prevalence of this practice as a debt management tool, this study seeks to determine whether it is truly perceived to be value enhancing by stockholders. Using an event study of 50 companies announcing bond indenture consent solicitations, we find that shareholders do benefit, and companies appear well served by this practice. Full article

This study examines the moderation effects of corporate governance provisions on the link between family involvement (i.e., family ownership and family management) in publicly-traded firms and firm performance by drawing upon agency theory, with a focus on principal-principal agency issues, and the extant family governance literature. We develop and test the hypotheses on 386 of the S&P 500 firms longitudinally. Findings support the hypotheses suggesting the moderation effects of the use of provisions (a) protecting controlling owners in terms of their sustainability of controlling status, and (b) protecting management legally on the inverted U-shaped relationship between family ownership and firm performance. We also found support for the moderation effects of provisions (c) protecting controlling owners in terms of their voting rights, (d) protecting noncontrolling owners, and (e) protecting management monetarily on the inverted U-shaped relationship between family management and firm performance. By this, our study provides empirical support for the principal-principal agency perspective on the corporate governance in publicly-traded family firms. As such, it suggests new avenues of research for both the corporate governance literature, as well as for the theory of the family firm. Our study also offers insights to policy directed toward monitoring the actions of large shareholders such as family and enhancing the overall shareholder value in publicly-traded family firms. Full article

Existing literature has identified domestic restrictive monetary policy and deteriorating funding conditions as the predominant factors explaining the increase in net interoffice accounts of global banks, that is, the net liabilities of parent offices due to their related foreign offices. The purpose of this research is twofold. Firstly, it quantifies the responsiveness of net interoffice accounts to variations in different types of domestic funding. Secondly, the paper assesses whether the relationship between net interoffice accounts and domestic policy-steered rates depends on cross-sectional differences in the funding structure of global banks. Using US banks’ balance sheets data collected by the Federal Financial Institutions Examination Council, the results highlight the importance of domestic repo borrowings in explaining net interoffice accounts, especially for larger banks during the crisis. On the other hand, a negative relationship between policy rates and net interoffice accounts is observed only for those global banks with a relatively higher share of repo borrowings. Full article