Systemic risk in non financial companies: Does governance matter?

The paper investigates the impact of four key corporate governance mechanisms - board, audit, compensation and ownership, and anti-takeover provisions - on the exposure and contribution to systemic risk of >400 US non-financial companies (NFCs) listed in S&P500 from 2005 to 2020. Our results show that in NFCs, unlike in banks, good corporate governance practices constrain both systemic risk exposure and contribution. We find a complementary effect between internal corporate governance mechanisms in reducing both the contribution and the exposure to systemic risk, and a substitution effect between internal and external governance practices in constraining the exposure of NFCs to systemic risk. Moreover, strong corporate governance practices are shown to constrain systemic risk both in steady-state conditions and in times of distress.     

Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy?

We examine whether and how selected central banks responded to episodes of financial stress over the last three decades. We employ a recently developed monetary-policy rule estimation methodology which allows for time-varying response coefficients and corrects for endogeneity. This flexible framework applied to the USA, the UK, Australia, Canada, and Sweden, together with a new financial stress dataset developed by the International Monetary Fund, not only allows testing of whether central banks responded to financial stress, but also detects the periods and types of stress that were the most worrying for monetary authorities and quantifies the intensity of the policy response. Our findings suggest that central banks often change policy rates, mainly decreasing them in the face of high financial stress. However, the size of the policy response varies substantially over time as well as across countries, with the 2008–2009 financial crisis being the period of the most severe and generalized response. With regard to the specific components of financial stress, most central banks seemed to respond to stock-market stress and bank stress, while exchange-rate stress is found to drive the reaction of central banks only in more open economies.     

Nonperforming loans in the GCC banking sectors: Does the Islamic finance matter?

This paper investigates the bank-level and country-level factors determining nonperforming loans (NPL) in the commercial banking industry of Gulf Cooperation Council (GCC) countries. Specifically; it examines the impact of the sectoral distribution financing growth and Islamic finance methods growth on NPL. To do so, we apply generalized method of moments (GMM) techniques, over the 2005–2011 period. Our findings indicate that the sectoral distribution of Islamic financing has an adverse impact on NPL, which suggest that the sectoral financing growth of Islamic banks increases the credit risk exposure more than conventional banks. The findings of the Islamic finance methods growth show that the impact of fixed-income debt contracts could increase NPL more than profit-and-loss-sharing contracts.     

Does financial globalization still spur growth in emerging and developing countries? Considering exchange rates

This paper analyzes the effects of financial globalization on growth in developing countries, focusing on its interaction with exchange rate volatility. Based on dynamic panel data models and the two-step system generalized method of moments (GMM) estimator, it replicates the method of Gaies et al. (2019a; 2019b) and extends it by exploring a new spillover effect of financial globalization in terms of exchange rate volatility measured by six different indicators. The findings show the positive influence of investment–globalization (foreign direct investment and portfolio investment) on growth through the traditional channel of capital accumulation and by reducing the negative impact of exchange rate volatility. These impacts are not insured by indebtedness–globalization (foreign debt), thereby shedding light on the government’s decision in developing countries on foreign capital control policy. These results are robust to changes in the estimator and variables used.     

Audit committee financial expertise,gender, and earnings management: Does gender of the financial expert matter?

The effectiveness of the presence of financial expertise on the audit committee (AC) in reducing earnings management has been the subject of many previous studies with mixed findings. This paper suggests that the mixed findings may be due to prior studies not distinguishing between the genders of the financial experts on the AC. We investigate how financial expertise affects earnings management taking into account the gender of the financial expert. We use the data of a sample of 5660 US firm-year observations from 2007 to 2013 which was analysed using least squares regressions clustering by firm. The results indicate that proportion of financial expertise on the AC and gender reduces earnings management. We then group the AC financial experts by gender, and examine whether the gender of the financial expert matters. The results show that the proportion of female financial experts on the AC is significantly associated with less earnings management while the proportion of male financial experts does not significantly affect earnings management; this suggests that previous studies indicating that the presence of a financial expert on the AC may have been influenced by gender of the female financial experts. Further, our findings may also partly explain the contradictory findings of prior studies on the effect of financial expertise on the ACs effectivness.     

Corruption and innovation in private firms: Does gender matter?

In this study, we examine whether bribery impairs gender-based asymmetries in product/process innovation in developing economies. Based on firm-level data from Latin American countries, we reject the proposition that women behave differently with respect to bribing on the grounds of higher ethical/moral standards. After controlling for endogeneity and non-random treatment effects, we find that, in line with the Differential association and opportunity (DAO) theory, women in positions of influence (i.e., firm ownership and top management) are equally associated with firm-level bribing. Furthermore, the results indicate that women receive, on average, a greater payoff from bribing compared to male counterparts. At a practical level for firms wishing to innovate, the question of how to gain maximum advantage from each peso paid in bribes becomes an interesting amoral exercise. Our study reveals that promoting women into high-level positions on the basis of their superior morality is an ill-conceived presumption, which is not supported empirically.     

Does the strength of the legal systems matter for trade in insurance and financial services?

This paper investigates if the strength of the legal system impacts on the trade in insurance and financial services in the high-income OECD and developing countries. Our findings reveal a statistically significant positive correlation of rule of law and regulatory quality with the exports and imports of insurance and financial services. Our empirical findings also reveal a negative and statistically significant correlation of contract enforcement with the exports and imports of insurance and financial services. We conclude that strengthening the rule of law and contract enforcement mechanisms can facilitate higher levels of trade in insurance and financial services.     

Financial regulation and financial inclusion in Sub-Saharan Africa: Does financial stability play a moderating role?

This study examines the impact of financial regulation on financial inclusion in Sub-Saharan Africa, considering the moderating role of financial stability. By analysing the relationship between financial inclusion and the most prominent macro-prudential regulation (capital adequacy), we find that tightening prudential regulations could negatively impact access to finance, thereby conflicting with Sub-Saharan African economies’ financial inclusion goals. More specifically, the capital adequacy requirement tremendously reduces banks’ capacity to provide financial services and this could lead to credit rationing thereby reducing financial inclusion. The results also indicate that, the interaction of financial regulation with financial stability positively impacts financial inclusion. Thus, financial stability augments financial regulation to have an affirmative impact on financial inclusion. The practical implications of this paper are that, one of the ways central governments and policy makers in Sub-Saharan African countries can increase and get the most out of financial inclusion is to formulate policies targeted at reducing capital adequacy requirements of financial institutions and other constraints that limit the operations and efficiency of financial institutions. Such policies should also aim at creating an enabling environment to promote financial stability.     

Net foreign asset (com)position: Does financial development matter?

We investigate the relationship between a country's domestic financial development and the (composition of its) net foreign asset position using a pooled mean group estimator and data for 50 countries for the 1970–2007 period. The results show that financial development reduces a country's long-run net foreign asset position. In addition, financial development leads to higher net equity and lower net debt positions. These findings confirm the theoretical predictions of Mendoza et al. (2009). The results are robust to using different indicators of financial development and inclusion of the level of development of a country in the cointegrating relationship.     

Disclosure quality vis-à-vis disclosure quantity: Does audit committee matter in Omani financial institutions?

Review of Quantitative Finance and Accounting - We examine the impact of audit committee (AC) characteristics (e.g. AC foreign members, AC female members, AC members with multiple directorships, AC...     

Do financial analysts' long-term growth forecasts matter? Evidence from stock recommendations and career outcomes

Prior literature portrays long-term growth (LTG) forecasts as nonsensical from a valuation perspective. Instead, we hypothesize that LTG forecasts signal high effort and ability to analyze firms' long-term prospects. We document stronger market response to stock recommendation revisions of analysts who publish accompanying LTG forecasts. We also hypothesize and find that these analysts are less likely to leave the profession or move to smaller brokerage houses. Consistent with Reg. FD's intention to promote fundamental analysis of long-term earnings prospects, post-Reg. FD observations drive our results. Overall, we identify previously undocumented benefits accruing to analysts who publish LTG forecasts.     

South Korea’s finance–growth nexus: evidence from VARX analysis with financial crisis and openness

South Korea’s finance–growth nexus is empirically investigated by taking the elements of financial crisis and trade and financial openness through the newly developed approach of vector error-correction models (ECMs) with weakly exogenous I(1) variables (VARX). Considering financial development as a more complex phenomenon, we take into estimation two aspects of financial deepening that are measured by its size (private credit to GDP) and efficiency (private credit to total domestic deposits). The main findings are (1) financial efficiency contributes to accelerating economic growth; (2) the causality between economic growth and financial size is bilateral and negative; and (3) financial crisis is negative to both economic growth and financial development, whereas the growth-promoting effects of trade and financial openness are confirmed.     

The relationship between banking market competition and risk-taking: Do size and capitalization matter?

This paper addresses the effects of bank competition on the risk-taking behaviors of banks in 10 Latin American countries between 2003 and 2008. We conduct our empirical approach in two steps. First, we estimate the Boone indicator, which is a measure of competition. We then regress this measure and other explanatory variables on the banking “stability inefficiency” derived simultaneously from the estimation of a stability stochastic frontier. Unlike previous findings, this paper concludes that competition affects risk-taking behavior in a non-linear way as both high and low competition levels enhance financial stability, while we find the opposite effect for average competition. In addition, bank size and capitalization are essential factors in explaining this relationship. On the one hand, the larger a bank is, the more it benefits from competition. On the other hand, a greater capital ratio is advantageous for banks that operate in collusive markets, while capitalization only enhances the stability of larger banks under high and average competition. These results are of extreme importance when considering bank regulations, especially in light of the recent turmoil in the global financial markets.     

How does corporate social responsibility affect financial performance,financial stability,and financial inclusion in the banking sector? Evidence from Pakistan

This paper examines the impact of corporate social responsibility (CSR) on the financial performance, financial inclusion, and financial stability of the banking sector, focusing on annual data for 20 Pakistani commercial banks for the period 2008–2017. The results suggest that CSR, as well as age and size, has a positive impact on all three factors. However, high levels of leverage reduce financial inclusion and financial stability, while financial inclusion is also negatively associated with the tangibility of assets.     

How do financial globalization,institutions and economic growth impact financial sector development in European countries?

This paper examines the role of financial globalization, institutions and economic growth on the development of financial sector in European countries. We use panel data covering the period of 1989−2016. Using the composite index of financial development covers various dimensions of financial market, that is, depth, access and efficiency and four-way classification of institutions as suggested by Rodrik (2005) and Law et al. (2018), the empirical results indicate that economic growth and institutional quality are positively associated with financial development. Contrarily, financial globalization hinders the process of financial sector development. The results are robust to using alternative proxies of economic growth, institutional indicators and capturing the period of financial crisis. These empirical findings suggest policy guidelines to develop financial sector by using globalization, institutional quality and economic growth as economic tools.     

Cross-border M&As in the financial sector: Is banking different from insurance?

This paper investigates what factors might help explain the internationalization strategy of banks and insurance companies, by comparing the determinants of cross-border M&As in the two sectors in a unified framework. The empirical analysis shows that between 1990 and 2003 the internationalization of banks and insurance companies followed similar patterns. Distance and economic and cultural integration are important determinants for both the banks’ and the insurance companies’ expansion abroad. Comparative advantage also has a prominent role, the more so for banks. The evidence is less supportive of the view that cross-border M&As are more frequent between similar countries, as predicted by the new trade theory. Finally, and most interestingly, we find indirect evidence consistent with the hypothesis that implicit barriers to foreign entry are more important in explaining the behavior of banks than that of insurance companies.     

Investment and access to external finance in Europe: Does analyst coverage matter?

We aim to determine whether analyst coverage improves European firms’ access to capital markets and investment. Based on a data set that includes firms from several European countries between 2000 and 2015, we implement a treatment effect framework and an instrumental variables (IV) approach, in which the intensity of industry-level waves in coverage is used as an instrument for firm-level coverage. We show that analyst coverage is favorable to firms’ debt and share issuance and their investment expenses. Our paper emphasizes the key role of financial analysts in improving European firms’ financial conditions.     

Determinants of corporate debt maturity in South America: Do institutional quality and financial development matter?

We test whether a country's level of financial development or institutional quality (or both) has a first‐order effect on corporate debt maturity decisions on a sample of 359 non-financial firms from five South American countries over a 12‐year period. We find that there is a substantial dynamic component in the determination of a firm's debt maturity, and firms face moderate adjustment frictions toward their optimal maturities. More importantly, the level of financial development does not influence debt maturity, whereas the institutional quality of a country has a significant positive effect on the level of long-term debt in a firm's financial structure. Our results support the hypothesis that the quality of national institutions is an important determinant of corporate financing in general and of debt maturity in particular.     

Does financial development improve economic growth? The role of asymmetrical relationships

This paper investigates the impact of financial development on economic growth in India, a major emerging economy. We estimate more flexible models than typically found to capture potentially asymmetric relationships while accounting for trade openness, foreign direct investment, and technological development. We document a cointegrating and asymmetric relationship between the key variables using nonlinear and standard autoregressive distributed lag models. We find a consistently negative impact of financial development and foreign inflows on economic growth in India in the long and short run, while trade liberalization and technological development have positive effects. Our findings, therefore, suggest caution regarding financial market liberalization in India.