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Article
Publication date: 14 October 2019

Muhammad Hanif, Abdullah Iqbal and Zulfiqar Shah

This study aims to understand and document the impact of market-based – market returns and momentum – as well as firm-specific – size, book-to-market (B/M) ratio…

Abstract

Purpose

This study aims to understand and document the impact of market-based – market returns and momentum – as well as firm-specific – size, book-to-market (B/M) ratio, price-to-earnings ratio (PER) and cash flow (CF) – factors on pricing of Shari’ah-compliant securities as explanation of variations in stock returns in an emerging market – Pakistan’s Karachi Stock Exchange.

Design/methodology/approach

Initially, the authors test Fama and French (FF) three-factor model – market risk premium, size and B/M – followed by modified FF model by including additional risk factors (PER, CF and momentum) over a 10-year period (2001-2010).

Findings

Our results support superiority of FF three-factor model over single-factor capital asset pricing model. However, addition of further risk factors – including PER, CF and momentum – improves explanatory power of the model, as well as refines the selection of risk factors. In this study, CF, B/M and momentum factors remain insignificant. Traditional B/M factor in FF model is replaced by PER.

Practical implications

Based on the modified FF model, the authors propose a stock valuation model for Shari’ah-compliant securities consisting of three factors: market returns, size and earnings, which explains 76per cent variations in cross sectional stock returns.

Originality/value

To the best of the authors’ knowledge, this is the first study (which combines market-based as well as fundamental factors) on pricing of Islamic securities and identification of risk factors in an emerging market – Karachi Stock Exchange.

Details

Journal of Islamic Accounting and Business Research, vol. 10 no. 5
Type: Research Article
ISSN: 1759-0817

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Article
Publication date: 24 September 2019

Marc Schaffer

This macroeconomic analysis chronicles the risk behavior of market-based financial intermediaries and traditional depository institutions from 1980 to 2010 and assesses…

Abstract

Purpose

This macroeconomic analysis chronicles the risk behavior of market-based financial intermediaries and traditional depository institutions from 1980 to 2010 and assesses the role that competition, financial innovation and regulation played in their evolving risk behaviors. The paper aims to discuss these issues.

Design/methodology/approach

Using a two-part CAPM framework in line with Campbell et al. (2001), risk measures are constructed through the decomposition of industry-level risk and firm-level idiosyncratic risk. These constructed measures are used in a VAR model with a historical decomposition approach to assess the impact of the three factors on the relative risk behavior of these firms.

Findings

The results indicate that the market-based and traditional intermediaries exhibited a period of diverging relative average firm-level risk behavior followed by a period of converging risk behavior. Using the derived firm-level risk measures, the impact of competition, financial innovation and regulatory changes on explaining these changing risk behaviors is explored. The results suggest that regulatory changes (i.e. deregulation) can best explain the relative risk behavior over the divergence period through late 1999 relative to the other two variables. The period from November 1999 through the financial crisis marks the converging risk behaviors across these intermediaries. Over this period, the changing nature of competition played the most important role in driving these behaviors.

Originality/value

The key contribution of this analysis highlights the evolutionary changes in the risk behaviors of market-based and traditional financial intermediaries and the factors driving both their diverging and converging nature over time.

Details

Managerial Finance, vol. 45 no. 12
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 14 May 2018

Yoshie Saito

This paper aims to analyze the association between goodwill defined as difference between market and book value of equity and reports of nonrecurring items, namely…

Abstract

Purpose

This paper aims to analyze the association between goodwill defined as difference between market and book value of equity and reports of nonrecurring items, namely, special items, discontinued operations and extraordinary items to suggest information related to restructuring activities measured by these items can link the valuation and incentive roles of accounting. Economic intuition suggests that successful managerial efforts should increase firm value. Yet, the link between the valuation and stewardship roles of earnings has been difficult to verify.

Design/methodology/approach

The author first estimates whether nonrecurring items have an incremental ability to explain goodwill, measured as the difference between market and book value of equity, at the industry level and then estimates whether firm-specific accounting bias is associated with the industry-level signals sent by nonrecurring items. The author then analyzes whether these items are associated with the use of chief executive officer (CEO) market-based compensation.

Findings

The author’ results show that information contained in special items increases firm-specific goodwill, indicating that it sends signals to investors about future growth opportunities, while that of discontinued operations reduces goodwill, suggesting that it provides signals about the adjustments of book value. She does not find any significant informational role for extraordinary items. She also finds that the signals sent by special items are negatively associated with the use of CEO market-based compensation, while those relayed by discontinued operations are positively associated with the use of market-based pay.

Research limitations/implications

Contrary to prior studies, the results show special items and discontinued operations are both value and incentive relevant. There are two caveats to this analysis. First, owing to the frequent changes in the definition of discontinued operations, the analysis is conducted using data between 1992 and 2003. Second, some might argue that industry-level incremental R2 might not be appropriate for a compensation analysis. However, entities often use industry norms as a benchmark to set CEO compensation. Thus, it is reasonable to think that industry-level signals matter for executive pay.

Originality/value

The author’s findings suggest that compensation committees in firms across industries consider the information contained in special items and discontinued operations, and selectively alter the level of incentives to encourage managerial efforts.

Details

Review of Accounting and Finance, vol. 17 no. 2
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 2 October 2019

Dengjun Zhang

The purpose of this paper is to examine the impact of audit assurance on tax enforcement, which is represented by whether firms have been visited by tax officials and, if…

Abstract

Purpose

The purpose of this paper is to examine the impact of audit assurance on tax enforcement, which is represented by whether firms have been visited by tax officials and, if so, the total number of inspections per fiscal year. The efficiency of tax administration is further examined by whether it becomes a binding constraint to a firm’s operations.

Design/methodology/approach

The sample consists of 18,746 firm-year observations from 28 transition and market-based economies in Central-Eastern Europe. The binary logit model, the Poisson model and the ordinal logit model are applied to test the hypotheses.

Findings

The empirical results show that, while audit assurance does not reduce the probability of being visited by tax officials (regardless of visit times) for the two country groups, firms with audited financial reports meet tax officials less often in market-based economies but not in transition economies. Furthermore, only in market-based economies does audit assurance reduce the probability that tax administration becomes a severe obstacle to firms’ operations.

Originality/value

This study addresses the relationship between tax administration and audit assurance in market-based and transition countries. One implication of the empirical findings is that audit assurance would add benefits to business environments when countries evolve from transition to market-based economies.

Details

Journal of Accounting in Emerging Economies, vol. 9 no. 4
Type: Research Article
ISSN: 2042-1168

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Article
Publication date: 11 October 2021

Narander Kumar Nigam, Kirtivardhan Singh and Purushottam Arya

The existing literature point that the presence of women directors in a firm reduces its risk. However, the relation between boardroom gender diversity and a firm’s return…

Abstract

Purpose

The existing literature point that the presence of women directors in a firm reduces its risk. However, the relation between boardroom gender diversity and a firm’s return is widely disputed leading to no concrete answer. Some studies mention that women directors have a positive impact on firm performance, whereas, on the other hand, some findings suggest that women directors reduce financial performance. This paper aims to study the relationship of firm risk and return with boardroom gender diversity and the net impact on firm performance in the Indian context. This study uses not only traditional measures of risk and return but also the third measure of risk-adjusted returns to postulate its findings.

Design/methodology/approach

Based upon the data of the top 100 of the Bombay Stock Exchange-500 firms for the period FY 2009–2010 to FY 2018–2019, this study applied fixed effect panel regression and random effects Tobit regression to examine the effect of board gender diversity on firm performance.

Findings

The study concludes that firms with women directors on board have lower risk and lower returns. It also results in a higher risk-adjusted return, creating a positive impact on a firm’s performance.

Originality/value

The paper contributes to the existing literature on corporate governance by considering return, risk and risk-adjusted returns in single research to have a holistic measure of firm performance. It provides empirical evidence from one of the largest emerging economies, India where the female director and independent female director have been introduced recently.

Details

Journal of Indian Business Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1755-4195

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Article
Publication date: 1 March 2021

Young Hoon An, Soonkyoo Choe and Jihoon Kang

The purpose of this study is to analyse the effects of market-based and nonmarket-based strategies on firm performance in African countries. This study also investigates…

Abstract

Purpose

The purpose of this study is to analyse the effects of market-based and nonmarket-based strategies on firm performance in African countries. This study also investigates host country institutions' effect on the relationship between firm strategies and performance in these countries.

Design/methodology/approach

Data of 1,276 firms in five African countries were obtained from two different sources: The World Bank Enterprise Database and The Global Competitiveness Report. Two-stage least squares regression was applied.

Findings

Both market-based strategies and corporate political activity (CPA)improve firm performance in the African countries included in the analysis. Institutional development also has a direct positive impact on firm performance. However, the effect of CPA weakens as the host country shifts towards more efficient, market-oriented institutions. Furthermore, the results show that local African firms benefit more from institutional development than foreign firms.

Originality/value

The paper confirms and extends our understanding of the dynamic fit between institutions and strategy by highlighting the moderating role of institutional development on CPA and market-based strategies in enhancing firm performance.

Details

Multinational Business Review, vol. 29 no. 3
Type: Research Article
ISSN: 1525-383X

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Article
Publication date: 16 August 2021

Flávio Morais, Zélia Serrasqueiro and Joaquim J.S. Ramalho

The purpose of this paper is to investigate whether the effect of country and corporate governance mechanisms on zero leverage is heterogeneous across market- and…

Abstract

Purpose

The purpose of this paper is to investigate whether the effect of country and corporate governance mechanisms on zero leverage is heterogeneous across market- and bank-based financial systems.

Design/methodology/approach

Using logit regression methods and a sample of listed firms from 14 Western European countries for the 2002–2016 period, this study examines the propensity of firms having zero leverage in different financial systems.

Findings

Country governance mechanisms have a heterogeneous effect on zero leverage, with higher quality mechanisms increasing zero-leverage propensity in bank-based countries and decreasing it in market-based countries. Board dimension and independency have no impact on zero leverage. A higher ownership concentration decreases the propensity for zero-leverage policies in bank-based countries.

Research limitations/implications

This study’s findings show the importance of considering both country- and firm-level governance mechanisms when studying the zero-leverage phenomenon and that the effect of those mechanisms vary across financial and legal systems.

Practical implications

For managers, this study suggests that stronger national governance makes difficult (favours) zero-leverage policies in market (bank)-based countries. In bank-based countries, it also suggests that the presence of shareholders that own a large stake makes the adoption of zero-leverage policies difficult. This last implication is also important for small shareholders by suggesting that investing in firms with a concentrated ownership reduces the risk that zero-leverage policies are adopted by entrenched reasons.

Originality/value

To the best of the authors’ knowledge, this is the first study to consider simultaneously the effects of both country- and firm-level governance mechanisms on zero leverage and to allow such effects to vary across financial systems.

Details

Corporate Governance: The International Journal of Business in Society, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1472-0701

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Article
Publication date: 15 January 2020

Omar Al Farooque, Wonlop Buachoom and Lan Sun

This study aims to investigate the effects of corporate board and audit committee characteristics and ownership structures on market-based financial performance of listed…

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1643

Abstract

Purpose

This study aims to investigate the effects of corporate board and audit committee characteristics and ownership structures on market-based financial performance of listed firms in Thailand.

Design/methodology/approach

It applies system GMM (generalized method of moments) as the baseline estimator approach, and ordinary least squares and fixed effects for robustness checks on a sample of 452 firms listed on the Thai Stock Exchange for the period 2000-2016.

Findings

Relying mainly on the system GMM estimator, the empirical results indicate some emerging trends in the Thai economy. Contrary to expectations for an emerging market and prior research findings, ownership structures, particularly ownership concentration and family ownership, appear to have no significant influence on market-based firm performance, while managerial ownership exerts a positive effect on performance. Moreover, as expected, board structure variables such as board independence; size; meeting and dual role; and audit committee meeting show significant explanatory power on market-based firm performance in Thai firms.

Practical implications

These findings are important for policymakers in constructing an appropriate set of governance mechanisms in an emerging market context, and for corporate entities and investors in shaping their understanding of corporate governance in the Thai institutional context.

Originality/value

Unlike previous literature on the Thai market, this study is the first to use the more advanced econometric method known as system GMM estimator for addressing causality/endogeneity issues in governance–performance relationships. The findings indicate new trends in the explanatory power of ownership structure variables on market-based firm performance in Thai-listed firms.

Details

Pacific Accounting Review, vol. 32 no. 1
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 1 June 2015

Sheilla Nyasha and N.M. Odhiambo

This paper aims to survey the existing literature on the causal relationship between market-based financial development and economic growth – in both developed and…

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1687

Abstract

Purpose

This paper aims to survey the existing literature on the causal relationship between market-based financial development and economic growth – in both developed and developing countries, highlighting the theoretical and the empirical evidence.

Design/methodology/approach

The paper divides financial development into bank-based and market-based financial development, and it closely reviews the international literature on the relationship between market-based financial development and economic growth.

Findings

The direction of causality between market-based financial development and economic growth varies from one country to another, depending on various country-specific characteristics, data sets and the methodology used by the researcher. On balance, there is predominant support for the supply-leading response, where the development of the market-based financial sector is expected to precede the development of the real sector.

Originality/value

This review differs fundamentally from previous reviews, in that it divides financial development into bank-based and market-based financial development, and it focuses closely on market-based financial development and economic growth. The majority of the previous studies on this subject failed to make such a distinction, thereby focusing mainly on the general causal relationship between the overall financial development and economic growth. To the best of the authors' knowledge, this may be the first review of its kind to survey the existing research in detail on the causal relationship between market-based financial development and economic growth, in both developed and developing countries.

Details

Studies in Economics and Finance, vol. 32 no. 2
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 14 August 2017

Sujin Song, Hubert B. Van Hoof and Sungbeen Park

This study aimed to investigate the impact of the board composition on financial performance in the restaurant industry from a stewardship theory perspective.

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1361

Abstract

Purpose

This study aimed to investigate the impact of the board composition on financial performance in the restaurant industry from a stewardship theory perspective.

Design/methodology/approach

The composition of board was measured as the ratio of inside and outside directors. Firm performance was operationalized as return on assets (operational performance) and Tobin’s q (market-based performance). Panel regression analysis tested the research hypotheses.

Findings

Using data from 25 restaurant firms from 2007 to 2013, the study found an insignificant impact of board composition on operational performance. However, a higher proportion of inside board members increases market-based performance. A higher proportion of outside board members decreases market-based performance.

Practical implications

Supporting the basic tenets of stewardship theory, restaurant companies may consider changing the current practice of having a super-majority of outside directors and increase the inside board members. Because inside board member have greater experience with the organization and the industry, they have a better understanding of the status quo and are better able to respond to opportunities and threats in the environment.

Originality/value

Considering the scarcity of research on how the board composition affects firm performance in the hospitality context, the present study is a forerunner in its exploration of the impact of inside and outside directors on restaurant firms’ performance.

Details

International Journal of Contemporary Hospitality Management, vol. 29 no. 8
Type: Research Article
ISSN: 0959-6119

Keywords

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