Asymmetric exchange rate pass-through in an emerging market economy: The case of Mexico

This paper applies a nonlinear Autoregressive Distribute Lag to examine the exchange rate pass-through into consumer price inflation in Mexico. Overall, the evidence confirmed that ignoring the asymmetric (sign) effect of exchange rate movements on inflation may lead to incorrect inferences and policy conclusions. Exchange rate fluctuation is transferred to prices level more during currency depreciation than appreciation. We compare the macroeconomic performances between pre- and post-inflation targeting, and our findings reaffirmed that the pass-through has weakened significantly after launching inflation targeting in 2001. This result implies that low inflation in the sample period examined is good for Mexico because exchange rate pass-through declines after 2001. Consumer prices have become less responsive to exchange rate movements. We further observe a revival (strengthening) of oil price pass-through to domestic inflation in the post- inflation targeting period.     

Corporate ownership concentration and audit fees: The case of an emerging economy

The paper investigates the effects of corporate ownership concentration on audit fees in emerging economies, using Bangladesh as a case. Prior studies have indicated that audit fees in Bangladesh are significantly low. Also, the Bangladeshi private sector is dominated by high ownership concentration. Agency theory predicts that in an efficient market, managers in a highly concentrated ownership situation will have sufficient incentives to have more rigorous audits performed. However, managers in emerging economies, where the markets are not as strong, may not have similar incentives. We test whether audit fees in Bangladesh are related to corporate ownership concentration. Our results indicate that audit fees have a significant negative relationship with sponsor and institutional ownership concentrations. This indicates that in Bangladesh, companies actually pay lower audit fees when these are dominated by sponsor and institutional shareholders. For the public shareholders, we find a negative, but statistically insignificant relationship. The results seem to suggest that corporate ownership pattern may be a major factor in explaining the low audit fees in Bangladesh.     

Financial friction in an emerging economy

The objective of this study is to evaluate the role of the frictional domestic credit market in an emerging country by using a small-open-economy DSGE model with a banking sector. The calibration results show that the financial friction does not significantly influence the macroeconomic effects of the shocks to the domestic productivity, foreign interest rate and export demand. We also evaluate whether and how the trade and financial openness can influence the effects of the domestic financial shocks that in turn affect the supply of loans in the credit market. We show that greater trade and financial openness can reduce the macroeconomic impacts of the domestic financial distress. Under a more open international capital market, the capital outflow caused by the domestic financial shock does not lead to drastic exchange rate variation. This helps dampen the adverse effects of the financial distress on the economy.     

The nature of information in accruals and cash flows in an emerging capital market: The case of China

Our study investigates the relative and incremental information content of earnings, operating cash flows, and accruals in the emerging capital market of China. The issue is tested by regressing stock returns on the levels of earnings and their components. Based on a sample of 1516 firm-years for listed Chinese firms during 1995–1998, our results demonstrate that earnings have relative information content over operating cash flows. The autocorrelations and cross-sectional correlations also imply that earnings have greater persistence and predictability than operating cash flows. We also find that discretionary accruals provide incremental information beyond that contained in nondiscretionary accruals, consistent with the argument that discretionary accruals improve the relevance of earnings in reflecting the fundamental values of the listed Chinese firms. Unlike prior findings in the studies on developed markets, we find no strong evidence that the value attached to discretionary accruals is lower than the value attached to nondiscretionary accruals. This is consistent with the argument that managerial policy choices available for the listed Chinese firms were rather limited during our sample period under relatively uniform People's Republic of China Accounting Standards (PRC-GAAP), thus, producing fewer opportunities for earnings management. An alternative interpretation could be that Chinese investors are functionally fixated on earnings.     

The output and profit contribution of information technology and advertising investments in banks

This paper examines the contribution of investments in Information Technology (IT) and in advertising to the output and profits of Spanish banks, in the period 1983–2003. We find that the growth in the stock of IT capital explains one third of output growth of banks, and that an additional investment in IT of one million euros may be substituted for twenty-five workers. The paper also finds that advertising investments increase the demand for bank services with an elasticity of 0.22 for deposits and 0.11 for loans. For all the assets considered, the null hypothesis that banks use the profit-maximizing amount of services per period cannot be rejected with the data.     

Capital structure in an emerging stock market: The case of India

This paper applies two alternative methods of estimation, viz., fully modified OLS (FMOLS) and generalized method of moments (GMM), to analyse the determinants of the capital structure of Indian firms using a panel of 1169 non-financial firms listed in either the Bombay Stock Exchange or the National Stock Exchange over the period 1995-2008. The results thus obtained are robust across the estimation methods. Among the three alternative theories of capital structure, the pecking order theory and the static trade-off theory both seem to explain Indian firms’ decisions. However, there is little evidence to support the agency cost theory.     

Female leadership and borrowing constraints: Evidence from an emerging economy

This study investigates the differences in credit access between male-managed and female-managed firms using two Enterprise Censuses in Vietnam. Our findings reveal that women-managed firms are less likely to borrow from commercial banks than their male counterparts, even when controlling for other determinants such as CEO education and experience, firm size, and ownership. No difference in credit access is documented for firms borrowing from non-commercial banks. Once we control for firm characteristics and CEO demographic factors, approved loan size is higher for firms managed by female CEOs regardless of the borrowing source. Using decomposition analysis, we find firm size contributes most in explaining the difference in credit access between female and male-managed companies.     

Determinants and consequences of voluntary disclosure in an emerging market: Evidence from China

In this paper we examine empirically the determinants of voluntary disclosure in the annual reports of Chinese listed firms that issue both domestic and foreign shares and determine if the cost of debt capital is related to the extent of voluntary disclosure. We find the level of voluntary disclosure is positively related to the proportion of state ownership, foreign ownership, firm performance measured by return on equity, and reputation of the engaged auditor. There is no evidence, however, that companies benefit from extensive voluntary disclosure by having a lower cost of debt capital.     

Tacit vigilance in an emerging economy: An institution-based perspective of passive blockholder monitoring

We argue that the relative effectiveness of active and passive blockholder monitoring is driven by the institutional context of the Korean financial market, characterized by the dominance of chaebols and the pressure sensitivity of institutional blockholders. We believe that the extensive business ties between chaebols and blockholders effectively increase the cost of shareholder activism in Korea, making passive monitoring a more applicable governance mechanism for blockholders. We test whether passive monitoring affects a firm’s earnings quality, represented by earnings persistence, value relevance, and timeliness. Furthermore, we decompose institutional shareholding by portfolio turnover and nationality and then determine the monitoring channel that influences earnings quality. We find that passive monitoring by domestic blockholders is most effective in improving earnings quality in Korea. In addition, our findings highlight that the difference between the institutional context of developed economies and that of Korea results in different outcomes related to blockholder monitoring.     

Economic policy uncertainty and leverage dynamics: Evidence from an emerging economy

We test capital structure adjustments under dynamic trade-off theory using the standard partial adjustment framework, in light of long- and short-run economic policy uncertainties (EPU). Analysing a sample of Indian firms listed on the National Stock Exchange (NSE500) for 2009 to 2018, we report a positive association between EPU and leverage but a negative association between EPU and speed of adjustment. An additional analysis indicates that the positive influence of long-run policy shocks on leverage is channelled through the growth prospects available to them. The leverage of firms in industries that are more sensitive to government subsidies reports a stronger positive association between the two variables both in the long and short run. Also, analysis using the suppliers of credit emphasizes that the increase in cost of debt drives the positive association between EPU and leverage for Indian firms. By delving into the mechanisms that impact the association between EPU and speed of adjustment, we find that the negative impact of EPU on leverage adjustments is moderated through the change in investments and the cost of debt only in the long run. The group affiliated firms display a strong positive association between EPU and leverage but a stronger negative association between EPU and speed of adjustment. Our results are robust across alternative measures of EPU, leverage, technique vis-à-vis endogeneity, large sample (4165 listed Indian companies) and heterogeneities based on firm size.     

Predictors of revenue shifting and expense shifting: Evidence from an emerging economy

Prior literature established that managers engage in Revenue Shifting (RS) and Expense Shifting (ES) with an intent to report favourable operating performance; our paper extends such research in a new direction by investigating both forms based on the need, ease, and advantage of each form of shifting strategy. The study identifies firm-specific factors that incentivize firms to prefer RS over ES and vice-versa. We undertake a longitudinal study (2001–2019) using a sample size of 39,634 firm-years, enlisted in the Bombay Stock Exchange (BSE). Our results show that peer-performance, size, financial leverage, growth opportunities, accounting flexibility, and age of the firm are important determinants of RS and ES. Specifically, our results exhibit that large, levered, old, and high-growth firms are engaged in RS, whereas small, young, firms with lesser accounting flexibility, and firms operating below peer-performance are involved in ES. These results are robust to controlling for accruals earnings management, real earnings management, endogeneity, self-selection bias, and alternative measures of RS and ES. Our findings are helpful to auditors and investors in improving awareness of forms of classification shifting.     

Value relevance of accounting information: Evidence from an emerging market

Without making any distinction of the applicable accounting standards, this paper investigates, firstly, the value relevance of accounting information from 1999 to 2012 in different segments of the Chinese stock market. This investigation includes A-shares, prepared under Chinese Accounting Standards (CAS) for domestic firms; B-shares, prepared under either the International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) for both domestic and overseas firms; and H-shares prepared under either the IAS or Hong Kong GAAP for Hong Kong and overseas firms. Then, the paper examines whether or not the converged IFRS with CAS, applicable from 2007 onwards, is more value relevant when compared with prior to the 2007's standards (CAS, IAS, Hong Kong GAAP for A-share, B-share, and H-share markets, respectively). Based on 34,020 firm-year observations and after controlling for industry- and year-fixed effects, the findings suggest that accounting information is value relevant with A- and B-share markets, while it is partially relevant with the H-share market. The paper finds that the converged IFRS with CAS is more value relevant in A-shares and B-shares and it is partially more value relevant with the H-share market. These findings have implications for both policymakers and investors since they provide further empirical evidence for the current policy procedure which harmonizes local GAAP with IFRS.     

Firm size and the effectiveness of busy boards in an emerging economy

This paper examines the effect of multiple corporate board directorships on performance over a large sample of Indian firms. We show that this relationship is positive and highly significant, but only among small firms. Furthermore, among firms that start off as small at the beginning of our sample period and grow to be large towards the end of the period, the relationship is positive and significant when the firms are small but dissipates when the same firms grow to be large. These findings survive multiple estimation approaches and are robust to alternative measures of board busyness and firm performance.     

Voluntary disclosure in the annual reports of an emerging country: The case of Qatar

This study sets out to examine empirically the determinants of voluntary disclosure in the annual reports of 25 listed firms of Doha Securities Market (DSM) in Qatar forming approximately 86% of the total firms incorporated in DSM. It also reports the results of the association between company-specific characteristics and voluntary disclosure of the sample companies. A disclosure checklist consisting of 44 voluntary items of information is developed and statistical analysis is performed using multiple regression analysis. The findings indicate that age, size, complexity, and assets-in-place are significant and other variable profitability is insignificant in explaining the level of voluntary disclosure. However, this paper has contributed to the academic literature that firms in the Middle East provide voluntary corporate information which builds a confidence to the investors in general and Qatar in particular.     

The role of life insurance in an emerging economy: Human capital protection,assets allocation and social interaction

In this paper, we provide micro-econometric evidence on the determinants of life insurance demand in China, the largest emerging market in the world. We employ the China Household Income Project (CHIP) dataset for the year 2002 in the analysis. The timing is ideal, because of the nature of the less well developed capital markets and social security systems in China in 2002, which sets a suitable stage to study the insurance demand behavior of emerging markets. The results indicate that both the human capital protection motive and the asset allocation motive are important in explaining the purchase of life insurance in China. In addition, we present three empirical regularities: (1) the positive correlation between the returns to human capital and the returns to market portfolio decrease the demand for life insurance; (2) both the current wealth and future income of a household exert curvilinear impacts on life insurance demand; (3) the breadth of a households social connections has substantial impacts on life insurance demand.     

The effects of asymmetric information between borrowers and lenders in an open economy

This paper assesses the effects of asymmetric information between borrowers and lenders in an open economy with access to international capital markets. Information asymmetry and agency costs arise because only borrowers can costlessly observe actual returns from production. Agency costs increase the cost of external finance and lower steady state investment, capital and output. They also affect the business cycle and the central bank’s response to shocks. The long-run effects of agency costs are exacerbated in an open economy and their impact is influenced by the degree of access to international capital markets. The results thus highlight the importance of incorporating credit market interactions into open economy macroeconomic models.     

Adoption of digital banking channels in an emerging economy: exploring the role of in-branch efforts

The aim of this qualitative study is to analyse the role of in-branch efforts of banks on migrating customers from branch banking to digital banking in India. In-depth semi-structured interviews were conducted with bank executives representing senior management from public and private sector banks in India. Qualitative content analysis technique was used to analyse the data. Varieties of responses received during interviews were clubbed into four main themes based on data reduction, display, and conclusion-drawing processes. In-branch communication with customers, digital transformation of the branch, customer-centric initiatives, and redefined role of branch staff hold the potential to bridge the customers’ migration to digital banking. The paper suggests that the key identified factor in improving digital banking acceptance in India is the requirement of integrated cultural and organisational changes at the bank’s level to gain the customers’ confidence and trust in digital banking.

     

Beyond left versus right: Evolution of political economy in an information age

Current trends indicate the onset of a new era driven by the imperatives of information technology. Technology seems likely to unify left and right wing positions at all economic levels. At the corporate level, progressive firms are evolving into decentralized networks of self-managed ventures that resemble free markets, while being governed as coalitions of stakeholders that integrate profit and social goals into a broader, democratic form of business. At the national level, the USA, Europe and Japan are forming business-government-labour partnerships to create a more sophisticated economic system that fosters both democratic cooperation and free enterprise competition. Socialist states are also beginning to adopt similar principles. These trends suggest the Information Age may produce a new standard of political economy—‘Democratic Free Enterprise’—that represents a synthesis of liberal and conservative ideals.     

Determinants of capital structure in emerging markets: Evidence from Vietnam

Capital structure decision is an important corporate behavior which draws strong interest from different stakeholders. It is more important in emerging markets due to their unique legal, cultural and institutional characteristics. This paper sheds further light on the question of whether capital structure determinants are different in emerging markets. We utilize a new and unique data set containing firm specific attributes over the period from 2006 to 2015. Employing GMM estimator to control for endogeneity, the results indicate that the determinants of capital structure are different for long-term and short-term indicators.     

Philanthropic giving,market-based performance and institutional ownership: Evidence from an emerging economy

This paper investigates the association of philanthropic giving with market-based performance and institutional ownership using data from banks in Bangladesh from 2007 to 2013. Our findings suggest that banks with a higher level of philanthropic giving achieve better performance, with a positive association also found between philanthropic giving and institutional ownership. This implies that institutional owners invest in banks that contribute more to philanthropic activities. These findings should be of interest to managers, regulators and policy makers in countries that share similar financial and socio-economic systems.