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1 – 10 of over 15000This paper aims to analyze the impact of the introduction of anti-money laundering (AML) regulations on bank stock valuations in the USA. Regulations can have a negative impact on…
Abstract
Purpose
This paper aims to analyze the impact of the introduction of anti-money laundering (AML) regulations on bank stock valuations in the USA. Regulations can have a negative impact on financial returns as a result of increased operational costs, potentially driving down stock valuations and loss of profitability. However, regulations can also have a positive impact on valuations because of greater oversight and increased investor confidence. Findings are useful for assessing the market impact of future regulations.
Design/methodology/approach
Event studies and cross-sectional regression analysis are used to determine the impact on bank stock valuations together with specific characteristics of bank size and geographic headquarter location of the bank for identified AML regulations. Hypothesis related to the impact of the introduction of AML regulations are empirically tested based on the statistical significance of cumulative abnormal returns of markets.
Findings
AML regulations introduced in 1998 had a positive impact on bank stock valuations, while the USA PATRIOT Act legislation of 2001 had a negative impact. These findings suggest that recent AML regulation is a cost compliance burden for banks, where the costs of operations outweigh the benefits of improved processes. Larger banks see a more negative impact on their bank stock valuations compared to smaller banks, suggesting the market perceives greater cost and less profit for larger banks. Results also show that the location of bank’s headquarters does not significantly impact bank stock valuations.
Originality/value
This paper specifically focuses on the impact of AML regulations on the US banking sector, providing investors, academics and regulators additional insight on the market dynamics of regulations. Identifying whether the introduction of regulations has a significant impact on a bank’s performance will provide both banks and regulators clarity as to the net benefits associated with the current and future AML legislation.
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Shailesh Rastogi and Kuldeep Singh
The banking sector is undergoing a phase of transition worldwide. The degrees of flux may vary from country to country. Metamorphosis causes include financial distress, corporate…
Abstract
Purpose
The banking sector is undergoing a phase of transition worldwide. The degrees of flux may vary from country to country. Metamorphosis causes include financial distress, corporate governance issues, environmental and social issues and an avalanche of technological advancements. This study aims to explore how environmental, social and governance (ESG), one of the essential and contemporary change agents across the sectors, including in the banks, impacts the valuation of the banking sector. In addition, this study also aims at how another vital and inevitable change agent, information and communications technology (ICT) expenses, influence the ESG’s impact on bank valuation.
Design/methodology/approach
Panel data regression is conducted using valuation (Tobin’s Q and market capitalization) as endogenous variables, and ESG and expenditure on ICT are used as the main exogenous variables. The interaction term of ESG and ICT is also used as an exogenous variable.
Findings
Surprisingly, the authors find unequivocal evidence of the positive influence of ESG and ICT on bank valuation without consideration of ICT. In addition, ICT is also found to moderate the ESG’s influence on bank valuation positively. In particular, when ICT is low, an increase in ESG impacts the valuation negatively. However, high values of ICT cause ESG to impact the valuation positively.
Research limitations/implications
Without consideration of ICT, ESG investments coincide with the value-creating hypothesis. However, modern world firms do not have a choice of ignoring ICT, which is essential to sustain. Adequate investments in ICT shift the value-eroding ESG effects (at low ICT) toward a value-creating hypothesis (at high ICT) when ESG investments start to impact the value positively.
Practical implications
In practice, modern-day firms have no choice but to align with ESG investments. In cases where ESG tends to erode value (at low ICT), the firms should, in parallel, choose to make some ICT investments. Such combined and balanced attention to ICT, along with ESG, will undoubtedly benefit the firms financially.
Originality/value
The study’s significant implications are on the stakeholders’ mindsets, who may not have clarity on the role of ESG and ICT in the bank’s performance and subsequent valuation. The policymakers may also restructure their long-term policy on ESG in the banking sector using the current study’s findings.
Richard Lovell and Nick French
Studies the effects of the downturn in the property market in thelate 1980s on banking business practices and the banks′ consequentreassessment of their reliance on loan‐to‐value…
Abstract
Studies the effects of the downturn in the property market in the late 1980s on banking business practices and the banks′ consequent reassessment of their reliance on loan‐to‐value ratios for lending purposes. Looks at the philosophy underlying the RICS′s publication, in September 1995, of new valuation guidance notes and highlights the importance of the new requirements placed on the valuer.
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Aashi Rawal, Shailesh Rastogi, Jagjeevan Kanoujiya and Venkata Mrudula Bhimavarapu
The authors have attempted to reveal the impact that transparency and disclosure (T&D) and financial distress (FD) have on the valuation of banks working in India. T&D involves…
Abstract
Purpose
The authors have attempted to reveal the impact that transparency and disclosure (T&D) and financial distress (FD) have on the valuation of banks working in India. T&D involves disclosing the firm's operational and financial performance and corporate governance practices. FD is a position in which a company or individual is not in a condition to fulfill their promise of paying their obligations on time.
Design/methodology/approach
In this study, the authors have used panel data analysis (PDA) and secondary data of 34 banks working in the Indian banking sector for four financial years, i.e. 2016 to 2019.
Findings
This study has established that FD and T&D have a positive and significant impact on the valuation of firms. The authors also find evidence that T&D significantly impacts the value of firms under the influence of FD.
Practical implications
The present study implies that it will help firms realize how significantly the transparency level and disclosure policies impact their value in the market. Firms can understand how badly distressing situations can impact the company's whole image. This learning will encourage them to start managing their money and debts efficiently.
Originality/value
The authors study has considered T&D as an independent variable and FD as a moderating variable to find the interacting impact of T&D and FD on the valuation of banks working in India. No such study has come to the authors' knowledge that has established such a relationship of variables in the study.
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Ken-Yien Leong, Mohamed Ariff, Zarei Alireza and M. Ishaq Bhatti
The objective of this paper is to investigate the validity of stock valuation theories and their forecasting ability by conducting an empirical study. It employs four most…
Abstract
Purpose
The objective of this paper is to investigate the validity of stock valuation theories and their forecasting ability by conducting an empirical study. It employs four most commonly used theories which are then tested using 19-year banking-firm market data. The usefulness of these models demonstrates with promising results.
Design/methodology/approach
This paper conducts a multi-country study using the multi-model testing approach to evaluate validity of theories and forecast accuracy of banking firms. It employs four methodology models used in finance literature; (1) P/E multiples model, (2) accounting-information-based clean surplus model, (3) theoretical model based on Gordon and Shapiro (1956) method and (4) the Damodaran-Kottler Free Cash Flow or FCF theory based on discounting model.
Findings
The tests show that the four theories under tests have a significant fit with actual price formation. The explained variation ranges from 72 to 92%, so the explanatory power of the theories accounting for variations in bank prices over 19-year period is substantial. The models fit suggest that the P/E model has superior predictive power followed by the RIM, DDM and FCFE. These findings shed new lights on the relative performance of valuation models.
Research limitations/implications
The study is limited in terms of the sample period size for 1999–2019. The availability of essential financial data prior to 2000 is very limited, so one can understand interpretation of statistical results under certain assumptions.
Practical implications
The paper suggests that one-factor model is better than the two-factor model.
Originality/value
The work done in this paper is unpublished and original contribution to banking and finance literature and also not under consideration for publication in any other journal.
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Sunday Olarinre Oladokun and Manya Mainza Mooya
The pricing of professional service has been identified as one of the factors influencing the quality of service and willingness of clients to pay. However, the issue of service…
Abstract
Purpose
The pricing of professional service has been identified as one of the factors influencing the quality of service and willingness of clients to pay. However, the issue of service pricing is hardly seen as an object of discourse in real estate literature, especially among valuation studies, as it is obtainable in other fields. In Nigeria, it has become the practice for some sets of clients, especially financial institutions, to fix valuers’ remuneration based on the fact that these clients have market advantage. This practice and some other issues around pricing of valuers’ services have been going on for some years with little or no research insights from academics. The purpose of this paper is to examine the pricing system of valuation services within the Lagos property market with the aim of providing information to better valuation practice.
Design/methodology/approach
This study assumes an interpretive paradigm and adopts a qualitative research approach. In-depth semi-structured interviews were conducted with 24 registered valuers practising within the Lagos property market. Snowballing sampling technique was employed in selecting the registered valuers who were active in the practice of valuation in the study area. Data collected were analysed using thematic analysis with the aid of NVivo 12 software.
Findings
This study finds that the pricing system for valuation services in the study area can be broadly categorised under “negotiation” and “fixed rate” systems while the use of the “professional scale of charges” is more or less non-existent. The study also reveals various forms by which these systems are practised, and issues associated with them as well as the effects they have on valuation practice. The study further reveals the factors responsible for the continuous striving of the present pricing system which includes valuers’ inability to enforce the professional scale, competition in the market, buyers’ market syndrome, the game of numbers and the banks’ strategy to protect their customers. The authors also found that the low pricing of valuation service poses challenges to valuation practice and encourages unprofessional conducts that affect the quality of valuation output. The study also provides, albeit limited, an evidence of the relationship between valuation fee and quality of valuation.
Research limitations/implications
This study is limited to Lagos property market and only the practising valuers. Insights from other major cities and stakeholders in service pricing like clients and regulatory authority may produce more insightful results.
Originality/value
This study provides important insights into valuers’ experience in the area of service pricing and how this affects the delivery of professional services. It also serves as the research blueprint in giving research attention to the service pricing in property valuation practice.
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John A. Doukas and Wenjia Zhang
– The purpose of this paper is to test whether bank mergers are driven by equity overvaluation and management compensation incentives.
Abstract
Purpose
The purpose of this paper is to test whether bank mergers are driven by equity overvaluation and management compensation incentives.
Design/methodology/approach
To test whether equity mispricing drive bank mergers, the authors employ two alternative price-to-residual income valuation (P/V) measures for bidders and targets while the authors control for their growth prospects with the price-to-book (P/B) (two years before) ratio. The intrinsic value (V) is estimated using the three-period forecast horizon residual income model of Ohlson (1995) and perpetual residual income model that does not rely on analysts’ forecasts of future earnings prospects. The latter measure allows the authors to estimate V for a much larger sample of banks. The empirical analysis is supplemented with a standard event analysis and assessment of the long-term performance of bank mergers subsequent to the announcement date.
Findings
The evidence shows that bidders are overvalued relative to their targets, especially in equity offer deals. The authors also find that highly valued bidders: are more likely to use stock than cash; are willing to pay more relative to the target market price; are more likely to acquire private than public targets; earn lower announcement-period returns; fail to create synergy gains; experience long-term underperformance; and reward their top managers of with large compensation increases subsequent to mergers.
Originality/value
This study provides results consistent with the view that behavioral and managerial incentives play an important role in motivating bank mergers.
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In the context of the financial crash and the commercial property market downturn, the purpose of this paper is to examine the basis of valuation used in the UK commercial…
Abstract
Purpose
In the context of the financial crash and the commercial property market downturn, the purpose of this paper is to examine the basis of valuation used in the UK commercial property lending process. Post‐crisis there is discussion of countercyclical measures, including the monitoring of asset prices; however there is no consideration of a different approach to property valuation. This paper questions this omission, given the role that valuations play in the bank regulatory process.
Design/methodology/approach
The different bases of valuation available to lenders within international valuation standards are identified as market value (MV), mortgage lending value (MLV) and investment value (IV), with MV being the most used in the UK. Using the different bases in the period before the financial crisis, the UK property market is modelled at a national office, retail and industrial/warehouse sector level to determine the performance of each alternative valuation basis within the context of countercyclical pressures on lending.
Findings
Both MLV and IV would have produced lower valuations than MV, although there are some practical issues involved in adopting the different bases for the bank lending.
Originality/value
The use of a different valuation basis could provide lenders with tools for more informed and prudent lending.
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Bana Abuzayed, Philip Molyneux and Nedal Al‐Fayoumi
This paper examines whether earnings and its components are relevant and sufficient to bridge the gap between banks' market and book values, and also considers if bank efficiency…
Abstract
Purpose
This paper examines whether earnings and its components are relevant and sufficient to bridge the gap between banks' market and book values, and also considers if bank efficiency is “value relevant” for banks valuation.
Design/methodology/approach
This paper follows the value relevance literature methodology which tests for the difference between book and market values using a variety of indicators including net income and its components as well as bank efficiency (derived using DEA) and risk indicators. The regression models are estimated using OLS, random and fixed effects approaches for a sample of listed Jordanian banks between 1993 and 2004.
Findings
The main findings of this paper are twofold. First, it is found that earnings (and its components) are value relevant and explain the gap between market and book values. Secondly, cost efficiency, as an economic performance measure, provides incremental information, not contained directly in banks financial statements, to the market. Overall it is found that the components of net income are more important than aggregate net income in explaining bank value. Furthermore, bank operational efficiency adds incremental information in explaining the gap between market and book value. These results support the view that stock prices aggregate signals received by the market as well as from firm's accounting systems.
Practical implications
The study shows that bank efficiency indicators (along with more traditional accounting measures) help explain market values.
Originality/value
This is one of only a limited number of studies that link bank efficiency to market valuation. It is the first, we believe, to do this for banks operating in an emerging economy.
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Chukwuma C. Nwuba, Uche S. Egwuatu and Babatunde M. Salawu
The purpose of this paper is to investigate client influence on mortgage valuation in Nigeria to establish and rank the means of influence clients employ, and the impact of firm…
Abstract
Purpose
The purpose of this paper is to investigate client influence on mortgage valuation in Nigeria to establish and rank the means of influence clients employ, and the impact of firm characteristics on client influence.
Design/methodology/approach
A combination of cross-sectional survey and focus groups research designs was adopted. Questionnaire structured on five-point Likert format was used to collect data from a sample of valuation firms in five Nigerian cities. Descriptive statistics, χ2, and moderated hierarchical linear model were used for data analysis.
Findings
Clients’ means of influence on valuation are more of subtle approach than threat or coercion. The most prevalent means are respectively, plea for assistance, promise of continued retainership on banks’ valuer panels, and disclosing the loan amount. Client influence differs across cities; firm characteristics have no influence on client pressure.
Practical implications
The research provides basis for valuation bodies to review practice rules and standards and seek for legislation for valuer independence. It can serve as material for teaching and training in professional ethics.
Social implications
Biased valuations jeopardises credit risk mitigation process with potential for destabilising banks, finance sector, and consequences for the economy.
Originality/value
The study provides empirical evidence of the nature of client influence across several major Nigerian cities. In contrast to existing Nigerian studies that focus on single cities, the study covers several cities. It therefore provides a broad basis for problem-solving and decision-making.
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