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The Banking Sector Under Financial Stability
Type: Book
ISBN: 978-1-78769-681-5

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Book part
Publication date: 4 December 2018

Indranarain Ramlall

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The Corporate, Real Estate, Household, Government and Non-Bank Financial Sectors Under Financial Stability
Type: Book
ISBN: 978-1-78756-837-2

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Article
Publication date: 6 July 2012

Alberto De Marco, Giulio Mangano and Xin‐Yu Zou

The purpose of this paper is to determine the fundamental factors influencing the equity share in build‐operate‐transfer (BOT) investments in relation to the project risk profile.

Abstract

Purpose

The purpose of this paper is to determine the fundamental factors influencing the equity share in build‐operate‐transfer (BOT) investments in relation to the project risk profile.

Design/methodology/approach

The relationships between risk factors and equity participation into the capital structure of a BOT contract are examined using regression analysis of a dataset of toll road projects.

Findings

Results suggest that the inflation rate, the size of the investment, the construction period, the solidity of the vehicle company, and the organizational structure of the project are significant variables of the equity portion of financing.

Practical implications

The analysis may support project promoters by providing better understanding of the factors that might facilitate high debt leverages and by providing lending institutions with valuable information to integrate the method of determining the appropriate debt resources to be injected into a BOT project.

Originality/value

The paper contributes towards growing the body of knowledge regarding the way public‐private partnership initiatives are carried over and helps refine the capital structures of BOT projects.

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Built Environment Project and Asset Management, vol. 2 no. 1
Type: Research Article
ISSN: 2044-124X

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Article
Publication date: 1 February 2000

Robert Hibbard

This paper examines the implications of standard barter models of market equilibrium for financial security returns in New Zealand. The key question addressed is: does the…

Abstract

This paper examines the implications of standard barter models of market equilibrium for financial security returns in New Zealand. The key question addressed is: does the ‘equity premium puzzle’ of Mehra and Prescott (1985) found in the U.S. also hold in ?ew Zealand? To examine the existence of the equity premium puzzle, quarterly financial security returns and consumption data are examined from 1965 to 1997 to calibrate parameters in the Consumption Based Asset Pricing Model. Unlike much of the existing international evidence, this paper corrects for durable goods consumption following the assumptions of the model that all consumption be consumed in a given period. Numerical analyses indicate that the class of models examined are unable to generate equity premia consistent with historical estimates of the equity premium in New Zealand. Due to small sample variability however, while this discrepancy is material in size, the result is not statistically significant.

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Pacific Accounting Review, vol. 12 no. 2
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 17 August 2015

Harald Kinateder

– The paper aims to analyse the drivers of changes in European equity tail risk.

Abstract

Purpose

The paper aims to analyse the drivers of changes in European equity tail risk.

Design/methodology/approach

For this purpose, the paper uses a panel data model with fixed effects based on five explanatory variables including the VIX, the variance risk premium (VRP), the one-year lagged slope of the riskless term-structure, the default spread and market-specific illiquidity via the measure of Bao et al. (2011). The study analyses a comprehensive database of representative European equity indices from February 2003 to December 2013. The database just contains markets of euro member states to avoid biases due to different currencies. To measure equity tail risk, the ex post realized value-at-risk was used.

Findings

There is empirical evidence that the VIX, the VRP and the default spread are key determinants of equity tail risk changes across all markets. Moreover, the results reveal that market-specific illiquidity is an important determinant in PIIGS markets and the one-year lagged term-structure slope in core markets. The analysis also documents that market-specific risk premia are a relevant determinant of equity tail risk changes. Another finding is that risk premia in PIIGS markets are basically higher as in core markets, which reflect the higher risk involved in investing in PIIGS markets.

Originality/value

The paper offers a unique perspective on equity tail risk in aggregate equity markets and helps both investors and risk managers to get a comprehensive understanding of relevant drivers.

Details

The Journal of Risk Finance, vol. 16 no. 4
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 8 October 2018

Siti Raihana Hamzah, Obiyathulla Ismath Bacha, Abbas Mirakhor and Nurhafiza Abdul Kader Malim

The purpose of this paper is to examine the extent of risk shifting behavior in bonds and sukuk. The examination is significant, as economists and scholars identify risk

Abstract

Purpose

The purpose of this paper is to examine the extent of risk shifting behavior in bonds and sukuk. The examination is significant, as economists and scholars identify risk shifting as the primary cause of the global financial crisis. Yet, the dangers of this debt-financing feature are largely ignored – one needs to only witness the record growth of global debt even after the global financial crisis.

Design/methodology/approach

To identify the signs of risk shifting existence in the corporations, this paper compares each corporation’s operating risk before and after issuing debt. Operating risk or risk of a firm’s activities is measured using the volatility of the operating earnings or coefficient variation of earning before interest, tax, depreciation and amortization (EBITDA). Using EBITDA as the variable offers one distinct advantage to using asset volatility as previous research has – EBITDA can be extracted directly from firms’ accounting data and is not model-specific.

Findings

Risk shifting can be found in not only the bond system but also the debt-based sukuk system – a noteworthy finding because sukuk, supposedly in a different class from bonds, have been criticized in some quarters for their apparent similarity to bonds. On the other hand, this study thus shows that equity feature, when it is embedded in bonds (as in convertible bonds) or when a financial instrument is based purely on equity (as in equity-based sukuk), the incentive to shift the risk can be mitigated.

Research limitations/implications

Global awareness of the dangers of debt should be increased as a means of reducing the amount of debt outstanding globally. Although some regulators suggest that sukuk replace debt, they must also be aware that imitative sukuk pose the same threat to efforts to avoid debt. In short, efforts to ensure future financial stability cannot address only debts or bonds but must also address those types of sukuk that mirror bonds in their operation. In the wake of the global financial crisis, amid the frantic search for ways of protecting against future financial shocks, this analysis aims to help create future stability by encouraging market players to avoid debt-based activities.

Originality/value

This paper differs from the previous literature in two important ways, viewing risk shifting behavior not only in relation to debt or bonds but also when set against debt-based sukuk, which has been subjected to similar criticism. Indeed, to the extent that debts and bonds encourage risk shifting behavior and threaten the entire financial system, so, too, can imitation sukuk or debt-based sukuk. Second, this paper is unique in exploring the ability of equity features to curb equity holders’ incentive to engage in risk shifting behavior. Such an examination is necessary for the wake of the global financial crisis, for researchers and economists now agree that risk shifting must be a controlled behavior – and that one way of controlling risk shifting is by implementing the risk sharing feature of equity-based financing into the financial system.

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Journal of Islamic Accounting and Business Research, vol. 9 no. 5
Type: Research Article
ISSN: 1759-0817

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Article
Publication date: 5 September 2018

Siti Raihana Hamzah, Norizarina Ishak and Ahmad Fadly Nurullah Rasedee

The purpose of this paper is to examine incentives for risk shifting in debt- and equity-based contracts based on the critiques of the similarities between sukuk and bonds.

Abstract

Purpose

The purpose of this paper is to examine incentives for risk shifting in debt- and equity-based contracts based on the critiques of the similarities between sukuk and bonds.

Design/methodology/approach

This paper uses a theoretical and mathematical model to investigate whether incentives for risk taking exist in: debt contracts; and equity contracts.

Findings

Based on this theoretical model, it argues that risk shifting behaviour exists in debt contracts only because debt naturally gives rise to risk shifting behaviour when the transaction takes place. In contrast, equity contracts, by their very nature, involve sharing transactional risk and returns and are thus thought to make risk shifting behaviour undesirable. Nonetheless, previous researchers have found that equity-based financing also might carry risk shifting incentives. Even so, this paper argues that the amount of capital provided and the underlying assets must be considered, especially in the event of default. Through mathematical modelling, this element of equity financing can make risk shifting unattractive, thus making equity financing more distinct than debt financing.

Research limitations/implications

Global awareness of the dangers of debt should be increased as a means of reducing the amount of debt outstanding globally. Although some regulators suggest that sukuk replaces debt, they must also be aware that imitative sukuk poses the same threat to efforts to avoid debt. In short, efforts to ensure future financial stability cannot address only debts or bonds but must also address those types of sukuk that mirrors bonds in their operation. In the wake of the global financial crisis, amid the frantic search for ways of protecting against future financial shocks, this analysis aims to help create future stability by encouraging market players to avoid debt-based activities and promoting equity-based instruments.

Practical implications

This paper’s findings are relevant for countries that feature more than one type of financial market (e.g. Islamic and conventional) because risk shifting behaviour can degrade economic and financial stability.

Originality/value

This paper differs from the previous literature in two important ways, viewing risk shifting behaviour not only in relation to debt or bonds but also when set against debt-based sukuk, which has been subjected to similar criticism. Indeed, to the extent that debts and bonds encourage risk shifting behaviour and threaten the entire financial system, so, too, can imitation sukuk or debt-based sukuk. Second, this paper is unique in exploring the ability of equity features to curb equityholders’ incentive to engage in risk shifting behaviour. Such an examination is necessary for the wake of the global financial crisis, for researchers and economists now agree that risk shifting must be controlled.

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Managerial Finance, vol. 44 no. 10
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 October 2008

C. Correia and P. Cramer

This study employs a sample survey to determine and analyse the corporate finance practices of South African listed companies in relation to cost of capital, capital…

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Abstract

This study employs a sample survey to determine and analyse the corporate finance practices of South African listed companies in relation to cost of capital, capital structure and capital budgeting decisions.The results of the survey are mostly in line with financial theory and are generally consistent with a number of other studies. This study finds that companies always or almost always employ DCF methods such as NPV and IRR to evaluate projects. Companies almost always use CAPM to determine the cost of equity and most companies employ either a strict or flexible target debt‐equity ratio. Furthermore, most practices of the South African corporate sector are in line with practices employed by US companies. This reflects the relatively highly developed state of the South African economy which belies its status as an emerging market. However, the survey has also brought to the fore a number of puzzling results which may indicate some gaps in the application of finance theory. There is limited use of relatively new developments such as real options, APV, EVA and Monte Carlo simulation. Furthermore, the low target debt‐equity ratios reflected the exceptionally low use of debt by South African companies.

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Article
Publication date: 2 February 2015

Stephan Lang and Alexander Scholz

The risk-return relationship of real estate equities is of particular interest for investors, practitioners and researchers. The purpose of this paper is to examine, in an…

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Abstract

Purpose

The risk-return relationship of real estate equities is of particular interest for investors, practitioners and researchers. The purpose of this paper is to examine, in an asset pricing framework, whether the systematic risk factors play a significantly different role in explaining the returns of listed real estate companies, compared to general equities.

Design/methodology/approach

Running the difference test of the Fama-French three-factor and the liquidity-augmented asset pricing model, the authors analyze the effect of the systematic risk factors related to market, size, BE/ME and liquidity in a time-series setting over the period July 1992 to June 2012. By applying the propensity score matching (PSM) algorithm, the authors bypass the “curse of dimensionality” of traditional matching techniques and identify a comparable control sample of general equities, in terms of the relevant firm characteristics of size, BE/ME and liquidity.

Findings

The empirical results indicate that European real estate equity returns load significantly differently on the size, value and liquidity factor, while the influence of the market factor seems to be equivalent. In addition, the authors find an economically and statistically significant underperformance of European real estate equities, after accounting for the diverging role of systematic risk factors. Running the conditional time-series regression, the authors further reveal that these findings are predominately caused by the divergent risk-return behavior of real estate equities in economic downturns.

Practical implications

Due to the diverging role of the systematic risk factors in pricing real estate equities, the authors provide evidence of potential diversification benefits for investors and portfolio managers.

Originality/value

This is the first real estate asset pricing study to dissect the unique risk-return relationship of real estate equities by employing propensity score matching.

Details

Journal of Property Investment & Finance, vol. 33 no. 1
Type: Research Article
ISSN: 1463-578X

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Book part
Publication date: 4 December 2012

William Coffie and Osita Chukwulobelu

Purpose – The purpose of this chapter is to examine whether or not the Capital Asset Pricing Model (CAPM) reasonably describes the return generating process on the…

Abstract

Purpose – The purpose of this chapter is to examine whether or not the Capital Asset Pricing Model (CAPM) reasonably describes the return generating process on the Ghanaian Stock Exchange using monthly return data of 19 individual companies listed on the Exchange during the period January 2000 to December 2009.

Methodology/approach – We follow a methodology similar to Jensen (1968) time series approach. Parameters are estimated using OLS. This study is designed to measure beta risk across different times by following the time series approach. The betas of the individual securities are estimated using time series data of the excess return version of the CAPM.

Findings – Our test results show that although market beta contributes to the variation in equity returns in Ghana, its contribution is not as significant as predicted by the CAPM, and in some cases very weak. Our results also reject the strictest form of the Sharpe–Lintner CAPM, but we found positive linear relationship between equity risk premium and market beta. Instead, our evidence uphold the Jensen (1968) and Jensen, Black, and Scholes (1972) versions of the CAPM.

Research limitations/implications – This study is limited to the single-factor CAPM. Future studies will extend the test to include both size and BE/ME fundamentals and factors relating to P/E ratio, momentum and liquidity.

Practical implications – Our results will make corporate managers to be cautious when using CAPM as a basis to determine cost of equity for investment appraisal purposes, and fund managers when evaluating asset and portfolio performance.

Originality/value – The CAPM is applied to individual securities instead of portfolios, since the model was developed using information on a single security.

Details

Finance and Development in Africa
Type: Book
ISBN: 978-1-78190-225-7

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