On the role of foreign directors: Evidence from cross-listed firms

We examine the determinants of appointment of U.S. independent directors (USIDs), and their impact and effectiveness, on the boards of cross-listed foreign firms versus non-cross-listed firms. For non-cross-listed firms, significant determinants of USID presence include factors related to both advising and monitoring roles, whereas for cross-listed firms, appointment of USIDs are related to monitoring factors. We find that USIDs have a significantly positive impact on cross-listed firms’ value, especially for firms from countries that are culturally and institutionally different from U.S. and countries with weak investor protection. The positive value effect is strongest for firms in which USIDs serve on governance committees. We also find that cross-listed firms with UISDs are better at acquiring both domestic and cross-border targets and have higher CEO turnover sensitivity. For non-cross-listed firms, USIDs have negative or no impact on value.     

The impact of securities regulation on the earnings properties of European cross-listed firms

The objective of this study was to determine if the securities regulation in a foreign country is related to the earnings quality of European firms cross-listed in Europe. The study compared the post-listing earnings quality of 112 European firms cross-listed in 13 European stock exchanges during 1989–2001 to those of a controlled sample of non-cross-listed firms. Earnings quality was assessed by the use of reporting discretion to manage earnings. The regulatory strictness was represented by three indices of securities regulation.Empirical results provide some support to a positive association between earnings quality and the foreign securities regulation, suggesting that the foreign regulatory requirements have little or no effect on the reported earnings of European firms cross-listed in European exchanges.     

Former auditors on the audit committee and earnings management: Evidence from African banks

This paper investigates whether former auditors on the audit committee constrain earnings management through loan loss provisions. Based on an analysis of the annual reports of 82 African listed banks over the period 2011–2016, findings show that the presence of former auditors on an audit committee is associated with lower earnings management. This result suggests that audit committee members with auditing expertise and background contribute to effective monitoring of management’s accounting practices. Furthermore, results reveal that the reducing effect on earnings management of former auditors is strongest for directors who are unaffiliated with the bank’s current external auditor.     

The impact of taxation on bank profits: Evidence from EU banks

Using bank-level data for the period 1990–2005, we investigate to what extent European banks are able to shift their tax-burden forward. We examine the effects of corporate income tax (CIT) and value added tax (VAT) on pre-tax profits and their components, and find that both are shifted forward. The pass-through mainly involves total operating income, but as far as CIT is concerned it also affects loss provisions, with negative implications on stability of the banking systems.     

Inter-industry FDI spillovers from foreign banks: Evidence in transition economies

Using a sample of nonfinancial domestic firms in transition economies from Eastern Europe and Central Asia, we examine whether and how inter-industry spillover from foreign direct investment in the banking sector occurs. Our findings show that the innovation pursued by domestic firms benefits from foreign bank penetration. However, these positive inter-industry spillovers surprisingly do not seem to work through enhanced credit access. We further find these positive spillovers to occur mainly for foreign banks that use relationship lending, domestic firms that do not export, and host countries that are less open to the global market.     

Day of the week effect on foreign exchange market volatility: Evidence from Turkey

This paper assesses the day of the week effect of the daily depreciation of the Turkish lira (TL) against the US dollar (USD) and its volatility. The empirical evidence from Turkey presented here suggests that Thursdays are associated with higher and Mondays with lower depreciation rates compared to those of Wednesdays. Moreover, Mondays and Tuesdays are associated with higher volatility than Wednesdays.     

Managing earnings risk under SFAS 133/IAS 39: the case of cash flow hedges

Whereas empirical studies suggest that firm hedging is influenced by accounting standards such as SFAS 133 and IAS 39, the nature of earnings risk management remains a puzzle. I develop a model that shows how non-financial firms that prefer predictable earnings jointly optimize their hedging strategy and the choice between fair-value and hedge accounting. I also examine the implications of these decisions for earnings predictability under SFAS 133/IAS 39. In this model, which has two accounting periods, earnings uncertainty arises from economic shocks and accounting mismatches. The specific influence of accounting mismatches is isolated with two benchmarks, one for firm hedging (cash flow hedging) and another for an accounting system that fully complies with the matching principle. In this forward-looking analysis, most firms significantly decrease the hedging of long-term earnings when faced with persistent price dynamics. Under non-persistent price dynamics, the levels of long-term earnings hedging are only slightly reduced. Therefore, the influence of accounting mismatches on firm hedging is highly dependent on the economic environment in which a firm operates, which suggests that the potential influence of accounting on firm hedging may be difficult to identify in archival studies. The analysis also offers a forward-looking perspective on the changing properties of earnings since the late 1970s that supplements the existing body of archival accounting studies. For example, under persistent price dynamics, forward-looking short-term earnings volatility may increase tenfold or more for cash flow hedging under fair-value accounting compared with a perfectly matched accounting system.     

The determinants of price discovery: Evidence from US-Canadian cross-listed shares

We examine the determinants of price discovery for Canadian firms cross-listed on the main US stock exchanges over the period 1996–2011. Sampling at a one-minute frequency, we compute Gonzalo and Granger Component Shares (CS) and employ a system GMM approach to control for persistence in price discovery and endogeneity between CS and its determinants. We find that price discovery is highly persistent and that there is strong evidence of simultaneity between CS and its determinants. We conclude that lower relative spreads and higher relative trading activity increase an exchange’s contribution to price discovery. We also document that it is small trades that drive price discovery, particularly since the introduction of decimalization.     

The impact of bancassurance on efficiency and profitability of banks: Evidence from the banking industry in Taiwan

We set out in this study to investigate whether bancassurance business leads to improvements in the efficiency and profitability of banks. We examine the positive impacts on the system using actual data provided by a unique database on banks engaging in bancassurance business in Taiwan between 2004 and 2012. Our results reveal that banks with greater involvement in bancassurance business generally tend to experience improvements in their efficiency, and thus also accrue greater profits. Our empirical results provide evidence to support that bancassurance business offers substantial benefits for banks, ultimately leading to an increase in shareholder value. Finally, our results also reveal that the adoption of a diversification strategy in bancassurance can impact bank performance.     

The impact of foreign bank entry in emerging markets: Evidence from India

This paper uses the entry of foreign banks into India during the 1990s—analyzing variation in both the timing of the new foreign banks’ entries and in their location—to estimate the effect of foreign bank entry on domestic credit access and firm performance. In contrast to the belief that foreign bank entry should improve credit access for all firms, the estimates indicate that foreign banks financed only a small set of very profitable firms upon entry, and that on average, firms were 8 percentage points less likely to have a loan after a foreign bank entry because of a systematic drop in domestic bank loans. Similar estimates are obtained using the location of pre-existing foreign firms as an instrument for foreign bank locations. Moreover, the observed decline in loans is greater among smaller firms, firms with fewer tangible assets, and firms affiliated with business groups. The drop in credit also appears to adversely affect the performance of smaller firms with greater dependence on external financing. Overall, this evidence is consistent with the exacerbation of information asymmetries upon foreign bank entry.     

The impact of trading halts on liquidity and price volatility: Evidence from the Australian Stock Exchange

This study examines market behaviour around trading halts associated with information releases on the Australian Stock Exchange, which operates an open electronic limit order book. Using the Lee, Ready and Seguin (1994) pseudo-halt methodology, we find trading halts increase both volume and price volatility. Trading halts also increase bid-ask spreads and reduce market depth at the best-quotes in the immediate post-halt period. The results of this study imply that trading halts impair rather than improve market quality in markets that operate open electronic limit order books.     

The impact of competition on the operations of foreign banks in Australia in the post-deregulation period

In 1985, Australia removed its long-standing embargo on the entry of foreign banks. The Australian market therefore provides an opportunity to study the factors influencing multinational bank expansion in a new host country. This paper tests a model of the size of multinational banking operations in Australia in the post-embargo period. One major finding is that a push for market share in a highly competitive environment led to risky lending practices in the global boom-bust economic climate of the late 1980s, which adversely affected the foreign banks’ performance. Another is that competition from home country banks had a significantly negative effect on foreign banks’ asset volumes.     

The impact of state and foreign ownership on banking risk: Evidence from the MENA countries

This paper investigates the impact of foreign and state ownership on banking risk. Panel data regression analysis is applied to a sample of 171 commercial banks from the MENA region during the 2006–2012 period. Two-stage least-squares analysis is conducted. Our results show that State ownership encourages banks to take more risks while foreign ownership reduces risk-taking. In addition, state-owned banks tend to increase capital adequacy ratio to hedge against high level of risk. Our finding also indicates that all categories of shareholders take a prudent attitude that influences risk reduction after the 2008 crisis.     

The impact of Covid-19 on G7 stock markets volatility: Evidence from a ST-HAR model

We investigate the impact of Covid-19 on stock markets across G7 countries and their business sectors. We highlight the synchronicity and severity of this unprecedented crisis. We find strong transition evidence to a crisis regime in all countries and sectors, yet crisis intensity and timings vary. The Health Care and Consumer services sectors were the most severely affected; a reflection of the Covid-19 drug-race and international travel restrictions. The Technology sector was hit the latest and least severely, as imposed lockdown measures forced people to explore various web-based entertainment and distraction options. Country-wise the UK and the US were the most affected with the highest heterogeneity in their business sectors' response; a possible reflection of the ambiguity in the initial response and adoption of lockdown measures. Financial markets' response to Covid-19 is akin to response in previous financial crisis rather than previous pandemics. A series of robustness checks confirms our findings.     

Transmission of shocks from cross-listed markets to the return and volatility of domestic stocks

This paper examines the transmission of information from German and the U.S. markets to domestic markets using daily price and volume data of 264 stocks from 26 countries that are traded in their home country and cross-listed outside their home market as depository receipts (DRs); in the German market as Global Depository Receipts (GDRs) and in the U.S. as American Depository Receipts (ADRs). We identify days with significant news arrivals in a market through minimum thresholds for both significant absolute price change and trading volume. DR returns and volatilities are affected by the shocks in the markets where they are cross-listed controlling for domestic shocks. Contemporaneous and/or lagged shocks to the cross-listed markets are transmitted to domestic stock returns and volatilities. South American DRs are affected mostly by U.S. shocks, while Eastern European DRs show greater reaction to the German shocks.     

Investor protection and the liquidity of cross-listed securities: Evidence from the ADR market

Using ‘American depository receipt’ (ADR) data on various countries, this paper sets out to investigate the relationship between investor protection and firm liquidity. Since weak investor protection leads to greater expropriation by managers, and thus greater asymmetric information costs, liquidity providers will incur relatively higher costs and will therefore offer higher bid–ask spreads. The empirical results demonstrate that the liquidity costs of poor investor protection were more significant during the period of the Asian financial crisis when the expected agency costs were particularly severe. This issue is further analyzed by investigating whether there is any evidence of increases in the vulnerability of ADRs of firms operating in countries with relatively poor investor protection mechanisms during periods of financial crisis.     

The impact of SFAS No. 141 on earnings predictability of merging firms: Evidence from the initial year of implementation

This study examines the impact of SFAS 141 on earnings predictability of merging firms. I expect a relative improvement in analysts’ earnings forecast accuracy for merging firms versus non-merging peers after SFAS 141 adoption. I restrict the post-SFAS 141 sample to the initial year of SFAS 141 implementation. This research design disentangles effects of SFAS No. 141 from those of SFAS No. 142. The evidence from analysis of 48 pairs of merging and matched non-merging firms is consistent with expectations and confirms the increase in earnings predictability for merging firms versus their non-merging peers post-SFAS 141. Results of additional tests suggest that earnings predictability improvement more likely follows from extended disclosure requirements and the other changes in the Purchase Method (“better purchase” issue) than from the elimination of Poolings-of-Interest (“purchase vs. pooling” issue).     

Distilling private information from plain-vanilla options to predict future underlying stock price volatility: Evidence from the H-shares of Chinese banks

Deviations from put-call parity may arise in response to private information that a select group of investors possess. From a practical perspective, if one possesses private information, using options to speculate or hedge amplifies potential gains given the leverage embedded in options with respect to price changes in the underlying asset. In light of this, and if we assume that the average investor does not possess private information, it is perhaps possible though to infer such information through implied variance spreads and use it to predict future volatility in the underlying asset. In this piece I examine the extent to which such information is economically informative in predicting the intraday return variability of H-shares issued by China's state and joint-stock banks, respectively. Generally speaking, I uncover the following; firstly, call-put implied variance spreads are mean-reverting across time. Secondly, at any given point in time, the magnitude of the deviation from put-call parity is informative in predicting rises in future spot price volatility. Thirdly, straddle/strangle trades predict, at times one week in advance, rises in future spot price volatility. These findings hold after controlling for market-wide implied volatility, the flow and shock in information disseminating to the market, and implicit transactions costs.     

The impact of religiosity on earnings quality: International evidence from the banking sector

We examine the impact of religiosity on earnings quality, utilising a global sample of 1283 listed banks headquartered in 39 countries and covering the period 2002–2018. Using instrumental variables two-stage least squares regressions, we demonstrate that religiosity has a significant positive impact on banks’ earnings quality. We further show that the impact of religiosity becomes more pronounced among banks headquartered in countries where religion is an important element of national identity and in countries with weak legal protection. We show that the effects of religiosity are more intense during the global financial crisis period. Overall, these findings support the notion that high religiosity tends to reduce unethical activities by managers and can function as an alternative control mechanism for minimising agency costs. Our empirical investigation is robust to alternative model and sample specifications.     

The dynamics of price discovery for cross-listed shares: Evidence from Australia and New Zealand

This paper studies the dynamics of price discovery for markets with bilateral cross-listings. Using a sample of four Australian stocks cross-listed in New Zealand and five New Zealand stocks cross-listed in Australia for the period January 2002 to December 2007, we assess Hasbrouck (1995) information shares and Grammig et al. (2005) conditional information shares over time. We observe that in both cases the home market is dominant in terms of price discovery. However, when studying price discovery over time, we find that the importance of the Australian market (the larger of the two markets) is increasing for both Australian and New Zealand domiciled firms. Finally, using panel regression analysis, we find that the growth in the importance of the Australian market is positively related to the growth in the size of the firm and negatively related to the size of the percentage spread in the Australian market, implying that as firms grow larger and their cost of trading in Australia declines, the Australian market becomes more informative.