IDENTIFYING THE MODERATOR FACTORS OF FINANCIAL PERFORMANCE IN GREEK MUNICIPALITIES

The use of financial ratios is a widespread method for assessing the financial performance of private sector companies. However, the application of an analogous exercise in the public sector is a less straightforward one. In the later case it is a multifaceted task that involves judgments about the interplay of complex social, organizational and financial factors. In this paper we use accrual end of the year financial statements data of Greek Municipalities for the period 2002–2004 to compute nine commonly used performance assessment financial ratios. We find corroborative evidence that factors, which are exogenous to the municipalities’ control, such as their wealth and size, have statistically significant impact on ratio values. Thus, as financial ratios are significantly influenced by socio‐economic factors like municipal wealth and size, cross sectional comparisons on the basis of these ratios should be made with caution and performed for municipalities that exhibit similarities in terms of size and wealth.     

The Time Series Properties of Financial Ratios: Lev Revisited

This paper re‐evaluates the time series properties of financial ratios. It presents new empirical analysis which explicitly allows for the possibility that financial ratios can be characterized as non‐linear mean‐reverting processes. Financial ratios are widely employed as explanatory variables in accounting and finance research with applications ranging from the determinants of auditors' compensation to explaining firms' investment decisions. An implicit assumption in this empirical work is that the ratios are stationary so that the postulated models can be estimated by classical regression methods. However, recent empirical work on the time series properties of corporate financial ratios has reported that the level of the majority of ratios is described by non‐stationary, I (1), integrated processes and that the ratio differences are parsimoniously described by random walks. We hypothesize that financial ratios may follow a random walk near their target level, but that the more distant a ratio is from target, the more likely the firm is to take remedial action to bring it back towards target. This behavior will result in a significant size distortion of the conventional stationarity tests and lead to frequent non‐rejection of the null hypothesis of non‐stationarity, a finding which undermines the use of these ratios as reliable conditioning variables for the explanation of firms' decisions.     

Proportionate Growth and the Theoretical Foundations of Financial Ratios

The article proposes a theoretical framework for understanding financial ratios, showing that the multiplicative character of the financial variables from which financial ratios are constructed is a necessary condition of valid ratio usage, not just an assumption supported by evidence. Also, by assuming that firm size is a measurable statistical effect, the article offers an informed reappraisal of the limitations of financial ratios, particularly the well–known limitation of proportionality. The article is divided into two parts, one where ratio components are viewed as deterministic vari– ables and the other where they are random. Such an approach allows the characteristics of ratios to be more easily understood before generalizing the relationship between ratio components to encompass randomness. In the second part, when variability introduced by firm size is treated as a random effect, it is shown that if the accounting variables Y and X used to calculate a financial ratio Y/X are exponential Brownian motion, and if continuous growth rates are equal and proportionate to firm size, this may lead to ratios which are asymmetric but which do not necessarily drift.     

METHODOLOGICAL IMPLICATIONS OF NON-NORMALLY DISTRIBUTED FINANCIAL RATIOS: A COMMENT

This comment argues that proposals to replace financial ratio analysis with regression analysis of the separate ratio components are unnecessary and misguided. Financial ratios are used to predict other variables and not to predict their own components. These ratios also help deal with the size scale problem inherent in regular accounting data, but regression error terms would suffer from the same size effect as the regular data. The actual statistical distribution of financial ratios is an open, important question, but that question in itself does not call for an abandonment of fmancial ratios.     

Financial Ratio Adjustment: Industry-Wide Effects or Strategic Management

This paper proposes an alternative model for analyzing financial ratio behavior. The model postulates that (1) firms' financial ratios reflect unexpected changes in industry conditions; and (2) managers attempt to move their financial ratio toward the long-run desirable target. This model is employed to assess the relative weights of financial ratio movement that are associated with these two forces. The results show that changes in financial ratios can be due to both external shocks and strategic adjustment by management. The amount of financial ratio smoothing due to strategic adjustment appears to be substantial. Furthermore, the speed of convergence toward the optimal targets varies across industries and firms of different size.     

How To Choose a Capital Structure: Navigating the Debt-Equity Decision

In corporate offices as well as the classroom, there continues to be significant debate about the costs and benefits of debt financing. There is also considerable variation in corporate credit ratings, even among companies as large and successful as those that make up the S&P 500. Many companies have been reassessing how they manage their balance sheet and their rating agency relationships; and with the market's generally favorable response to recapitalizations and dividend increases, such financing issues are likely to receive even more attention.
Underlying the diversity of corporate credit ratings is widespread disagreement about the "right" credit rating—a matter that is complicated by the fact that the cost of debt varies widely among companies with the same rating. Although credit ratings are clearly tied to measures of indebtedness such as leverage and coverage ratios, the most important factor in most industries is a company's size. For many mid-sized companies, an investment-grade rating can be attained only by making a large, equity-financed acquisition—or by making minimal use of debt. In this sense, the corporate choice of credit rating can be as much a strategic issue as a financial decision.
Maintaining the right amount of financial fl exibility is a key consideration when determining the right credit rating for a given company (although what management views as value-preserving flexibility may be viewed by the market as value-reducing financial "slack"). A BBB rating will accommodate considerably more leverage (30–60%) in companies with fairly stable cash flows and limited investment requirements than in more cyclical or growth-oriented companies (10–20%). When contemplating taking on more leverage, companies should examine all major operating risks and view their capital structure in the context of an enterprisewide risk management framework.     

The characteristics of takeover targets q and other measures

This study attempts to assess differences in the financial characteristics of target and non-target firms using logit analysis and a case-control methodology in which control groups are matched by size or industry. The results indicate that unregulated non-financial target firms are characterized by low $\text{q}$ ratios (market/replacement values) and to a lesser extent high current financial liquidity. Measures of financial leverage were not found to be significant.     

Financial Rating of European Technology Companies: An International Comparison

The purpose of this study is to investigate possibilities to uniform financial rating of technology companies in Europe from the perspective of a potential investor. The data consist of financial statements of 6,370 companies from seventeen European countries and the US in 1993–1996. The data from 1994–1996 are used to measure three–year success and the data from 1993 to predict this success. Success is measured by the principal factor of six performance measures. Country risk, percentage change in GDB, size, and eight financial ratios calculated for 1993 are used as predictors of success in the binary logistic analysis.     

Capital ratios and bank lending: A matched bank approach

This paper examines the impact of bank capital ratios on bank lending by comparing differences in loan growth to differences in capital ratios at sets of banks that are matched based on geographic area as well as size and various business characteristics. We argue that such comparisons are most effective at controlling for local loan demand and other environmental factors. For comparison we also control for local factors using MSA fixed effects. We find, based on data from 2001 to 2011, that the relationship between capital ratios and bank lending was significant during and shortly following the recent financial crisis but not at other times. We find that the relationship between capital ratios and loan growth is stronger for banks where loans are contracting than where loans are expanding. We also show that the elasticity of bank lending with respect to capital ratios is higher when capital ratios are relatively low, suggesting that the effect of capital ratio on bank lending is nonlinear. In addition, we present findings on the relationship between bank capital and lending by bank size and loan type.     

小企业需要怎样的金融服务——以义乌箱包行业为例

小企业金融服务是长期探讨和研究的话题,但很少有人会从小企业具体运行的业务模式和资金流向去分析探究其资金需求的特点,本文以具有准入门槛低、劳动就业容量大、生产涉及面广等特征的义鸟的箱包行业入手去分析小企业的金融服务需求,先分析了箱包行业的业务模式、再分析箱包行业的资金特征和对应的资金需求,再是银行可根据这些资金需求开展哪些业务创新,最后得出银行做好小企业金融服务的关键点是:寻求可靠的风险控制点,把可能产生的各类风险通过合理、规范的设计进行转移消除这个结论.     

The efficacy of red flags in predicting the SEC's targets: an artificial neural networks approach

This paper illustrates the application of artificial neural networks (ANNs) to test the ability of selected SAS No. 53 red flags to predict the targets of the SEC investigations. Investors and auditors desire to predict SEC targets because substantial losses in equity value are associated with SEC investigations. The ANN models classify the membership in target (investigated) versus control (non-investigated) firms with an average accuracy of 81%. One reason for the relative success of the ANN models is that ANNs have the ability to ‘learn’ what is important. The participants in financial reporting frauds have incentives to appear prosperous as evidenced by high profitability. In contrast to conventional statistical models with static assumptions, the ANNs use adaptive learning processes to determine what is important in predicting targets. Thus, the ANN approach is less likely to be affected by accounting manipulations. Our ANN models are biased against achieving predictive success because we use only publicly available information. The results confirm the value of red flags, i.e. financial ratios available from trial balance in conjunction with non-financial red flags such as the turnover of CEO, CFO and auditors do have predictive value. © 2000 John Wiley & Sons, Ltd.     

Double Entry Bookkeeping and the Distributional Properties of a Firm's Financial Ratios

Our purpose here is to assess whether the innate properties of the double entry bookkeeping system are such that financial ratios, calculated from the balance sheet summary measures implied by it, will be generated by distributional forms with non‐convergent moments. Our analysis begins with a brief summary of some important analytical properties of the debt and equity components of the double entry bookkeeping system. We then use these to determine the time series and distributional properties of the debt to equity ratio itself. Our analysis shows that even when the evolution of balance sheet summary measures like debt and equity can be described by 'well behaved' distributional processes, there is a distinct possibility that ratios derived from them will evolve in terms of distributional forms with non‐convergent moments. We argue that this has serious implications for parameter estimation as well as the integrity of the regression and/or discriminant procedures which underscore bankruptcy and financial distress prediction models based on financial ratios derived from the double entry bookkeeping system.     

METHODOLOGICAL IMPLICATIONS OF NON-NORMALLY DISTRIBUTED FINANCIAL RATIOS

Empirical studies have shown distributions of financial ratios are skewed. An explanation for this is given and it is argued that in such circumstances comparison of a fmancial ratio with some norm (e.g. industry average) is likely to misinform. It is also shown that where financial ratios are used as inputs to statistical models normality is irrelevant but a method of transformation into a normal distribution is provided whereby original interrelationships are preserved. Finally, because of the inadequacies of financial ratios, it is shown how regression analysis may be used in financial statement analysis.     

Using client performance measures to identify pre-engagement factors associated with qualified audit reports in Greece

The purpose of this paper is to test the extent to which client (corporate) performance measures can be used to enhance the ability to discriminate between the choice of a qualified or unqualified (clean) audit report. Audit firms face the risk of losing the client if they issue a qualification. On the other hand, failing to qualify exposes the auditor to potential lawsuits and loss of reputation. We examined the financial statements, auditors' opinions, and financial statements notes for companies in Greece that received a qualified audit report and for those that received an unqualified audit report. We modeled the auditor's qualification using a multicriteria decision aid classification method (UTADIS—UTilités Additives Discriminates) and compared it with other multivariate statistical techniques such as discriminant and logit analysis. The qualification decision is explained by financial ratios and by nonfinancial information such as the client litigation. The developed models are accurate in classifying the total sample correctly with rates of almost 80%.     

Firm Size,Book-to-Market Ratio,and Security Returns: A Holdout Sample of Financial Firms

Fama and French (1992) document a significant relation between firm size, book-to-market ratios, and security returns for nonfinancial firms. Because of their initial interest in leverage as an explanatory variable for security returns, Fama and French exclude from their analysis financial firms, thus creating a natural holdout sample on which to test the robustness of their results. We document that the relation between firm size, book-to-market ratios, and security returns is similar for financial and nonfinancial firms. In addition, we present evidence that survivorship bias does not significantly affect the estimated size or book-to-market premiums in returns. Our results indicate data-snooping and selection biases do not explain the size and book-to-market patterns in returns.     

Correlation and spillover effects between the US and international banking sectors: New evidence and implications for risk management

This paper quantitatively examines return transmission and volatility spillovers between banking sector stocks in the US and eight other countries by applying our newly extended VAR-DCC-MEGARCH-M model with asymmetric spillovers and Student-t or skew-t errors. Our investigations clarify almost unidirectional stock return transmission from the US banking sector to all other eight international banking sectors. In addition, we also uncover bidirectional volatility spillovers between the US and other eight international banking sector stocks, which are all tied to the leverage effect. Moreover, using the dynamic conditional variances and covariances from our extended model, we derive the time-varying optimal hedge ratios and optimal portfolio weights. These analyses reveal that, except for such extraordinary periods as during financial crises, we can hedge the US banking sector stocks with other international banking sector stocks, and that well-balanced portfolios of the US and other banking sector stocks are optimal. Furthermore, additional analysis using gold, silver, and platinum futures reveals that we can hedge international banking sector stocks with precious metal futures highly effectively, and that well-balanced portfolios of banking stocks and precious metals are optimal. Based on the results from our analyses, this paper derives many significant interpretations and implications for financial and systemic risk management.     

A Note on the Financial Variable and Ratio Structure of New Zealand Listed Companies*

This paper reports the results of an investigation into the financial structure of accounting variables and ratios of New Zealand listed firms. Seven major factors were identified and these accounted for more than 82 percent of the information contained in a set of forty-four variables. These factors are labelled profitability, size, activity, solvency, liquidity, growth in size and, growth in profits/profitability. Although the first five factors have also been identified as separate corporate dimensions in studies conducted in the United States and elsewhere, variables representing growth have not been examined before. Our study suggests that the growth variables represent two distinct and significant factors.     

Why Have Debt Ratios Increased for Firms in Emerging Markets?

I study trends in capital structure between 1980 and 2004 in a sample of over 11,000 firms from 34 emerging markets. The average firm's market‐value debt ratio rose by 15 percentage points over this quarter century. I study how this rise in leverage was influenced by firm‐level factors and by the availability of debt financing at the country level. The central finding is that the increase in debt ratios can largely be attributed to changes in the characteristics of emerging market firms over this period. For the average firm, the most prominent determinants of capital structure – size, profitability, asset tangibility, and growth opportunities – all shifted in the direction implying a higher optimal level of debt. At the country level, increased financial development within the country is associated with lower debt ratios, but increased financial openness to foreign markets is associated with higher debt ratios.     

Research horizons for public and private not‐for‐profit sector reporting: moving the bar in the right direction

The examination of public and private not‐for‐profit sector financial reporting has been a topic of interest on a cyclical basis in Australia over the last 30 years. Traditional topics have included examinations of the intended and unintended consequences of specific standards, the accountability value of financial reports, transaction neutrality, compliance with the accounting standards, and more recently, the prospective implications of new, differently focused reporting standards considering such issues as income measurement and outcomes reporting. With increased recent attention from standard setters and regulators, and greater data availability, the opportunities for undertaking impactful research in these and related areas are increasing. In this paper, we focus on research that has examined the following questions: (i) Which private and public NFPOs lodge financial reports and what is reported; (ii) Who are the users and what are their information needs? (iii) Which private and public NFPs should lodge financial reports and what should be included in them; and (iv) How should the accounting frameworks for NFP sector reporting be set? For each of these issues, we identify the research gaps and opportunities for further research.     

Morgan Stanley Roundtable on Capital Structure and Payout Policy

A group of finance academics and practitioners discusses a number of topical issues in corporate financial management: Is there such a thing as an optimal, or value‐maximizing, capital structure for a given company? What proportion of a firm's current earnings should be distributed to the firm's shareholders? And under what circumstances should such distributions take the form of stock repurchases rather than dividends? The consensus that emerged was that a company's financing and payout policies should be designed to support its business strategy. For growth companies, the emphasis is on preserving financial fl exibility to carry out the business plan, which means heavy reliance on equity financing and limited payouts. But for companies in mature industries with few major investment opportunities, more aggressive use of debt and higher payouts can add value by reducing taxes and controlling the corporate “free cash flow problem.” Both leveraged financing and cash distributions through dividends and stock buybacks represent a commitment by management to shareholders that the firm's excess cash will not be wasted on projects that produce growth at the expense of profitability. As for the choice between dividends and stock repurchases, dividends appear to provide a stronger commitment to pay out excess cash than open market repurchase programs. Stock buybacks, at least of the open market variety, preserve a higher degree of managerial fl exibility for companies that want to be able to capitalize on unpredictable investment opportunities. But, as with the debt‐equity decision, there is an optimal level of financial fl exibility; too little can mean lost investment opportunities but too much can lead to overinvestment.