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Article

Amal A. Said, Hassan R. HassabElnaby and Tanya S. Nowlin

The purpose of this paper is to examine the relative and incremental information content of a cash recovery‐based measure of performance, the estimated internal rate of…

Abstract

Purpose

The purpose of this paper is to examine the relative and incremental information content of a cash recovery‐based measure of performance, the estimated internal rate of return, vs an earnings‐based measure of performance, return on assets, in explaining firms' economic performance.

Design/methodology/approach

The paper uses the cash recovery rate that is based on continuous time analysis and U‐shaped cash flows to derive the estimated internal rate of return and compare it to return on assets. A cross‐sectional sample was used over a short interval (year 1993 and year 2005) and a time‐series sample (1993‐2005) to empirically examine the relative and incremental information content of the competing measures. Tobin's q and stock returns are used as performance benchmarks.

Findings

The results of the empirical tests indicate that the estimated internal rate of return provides better relative and incremental information content over earnings‐based measures of performance. Specifically, the empirical evidence shows that the estimated internal rate of return is consistently positively related to Tobin's q and stock returns over all measurement intervals.

Research limitations/implications

These results imply that earnings‐based performance measures are less value relevant compared to cash recovery‐based measures. There are some limitations that may apply to this study. First, the systematic measurement error in estimating the cash recovery rate may not be independent of the measurement error in the estimated internal rate of return. Second, the performance benchmarks used in the study are not free from problems. Particularly, the return on assets is influenced by firms' rate of growth and the Tobin's q is not a perfect measure of business performance. Therefore, one avenue of future research is to assess the usefulness of financial accounting data for analysts forecast. Moreover, future research may also examine the role of institutional changes in financial reporting and its effect on the quality of earnings and economic performance.

Originality/value

This paper presents extended research on cash recovery‐based vs earnings‐based metrics as proxies for economic return using improved research designs, larger samples and new sensitivity analyses.

Details

Review of Accounting and Finance, vol. 7 no. 4
Type: Research Article
ISSN: 1475-7702

Keywords

Content available
Article

Lindon J. Robison and Peter J. Barry

This paper demonstrates that present value (PV) models can be viewed as multiperiod extensions of accrual income statements (AISs). Failure to include AIS details in PV…

Abstract

Purpose

This paper demonstrates that present value (PV) models can be viewed as multiperiod extensions of accrual income statements (AISs). Failure to include AIS details in PV models may lead to inaccurate estimates of earnings and rates of return on assets and equity and inconsistent rankings of mutually exclusive investments. Finally, this paper points out that rankings based on assets and equity earnings and rates of return need not be consistent, requiring financial managers to consider carefully the questions they expect PV models to answer.

Design/methodology/approach

AISs are used to guide the construction of PV models. Numerical examples illustrate the results. Deductions from AIS definitions demonstrate the potential conflict between asset and equity earnings and rates of return.

Findings

PV models can be viewed as multiperiod extensions of AISs. Mutually exclusive rankings based on assets and equity earnings and rates of return need not be consistent.

Research limitations/implications

PV models are sometimes constructed without the details included in AISs. The result of this simplified approach to PV model construction is that earnings and rates of return may be miscalculated and rankings based as asset and equity earnings and rates of return are inconsistent. Tax adjustments for asset and equity earnings may be miscalculated in applied models.

Practical implications

This paper provides guidelines for properly constructing PV models consistent with AISs.

Social implications

PV models are especially important for small to medium size firms that characterize much of agricultural. Providing a model consistent with AIS construction principles should help financial managers view the linkage between building financial statements and investment analysis.

Originality/value

This is the first paper to develop the idea that the PV model can be viewed as a multiperiod extension of an AIS.

Details

Agricultural Finance Review, vol. 80 no. 5
Type: Research Article
ISSN: 0002-1466

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Book part

James S. Ang and Gregory L. Nagel

Our chapter raises serious questions about the long-term efficiency of stock prices in relation to the realized returns of the underlying corporate real assets. In our…

Abstract

Our chapter raises serious questions about the long-term efficiency of stock prices in relation to the realized returns of the underlying corporate real assets. In our large-scale calculations that cover horizons of 10, 20, 30, 40, and 50 years, returns on corporate real assets suffer a long-term decline, and have been below the yields of 10-year Treasury bonds since 1973. Real assets that received more external financing from capital markets and institutions actually report even lower realized long-term returns. The decline in realized returns cannot be attributed to declining risks as the volatilities of realized returns have been increasing over time. These surprising results may stimulate fresh debate on the roles and long-term performance of capital markets and institutions.

Details

Research in Finance
Type: Book
ISBN: 978-1-78190-759-7

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Article

James W. Bannister, Paul H. Mihalek and Carl S. Smith

Performance plans, a form of executive compensation plan, are designed to reward management for improved performance over the long run. Various accounting measures can be…

Abstract

Performance plans, a form of executive compensation plan, are designed to reward management for improved performance over the long run. Various accounting measures can be used to evaluate this performance: return on assets (ROA), return on equity (ROE), and earnings per share (EPS) are examples. This study employs these, as well as cash flow measures, on a sample of matched performance plan adopting and control firms to examine whether there is a difference in performance associated with the adoption of a plan. The results indicate that adopting firms display significantly greater growth in ROA, ROE, and working capital from operations to total assets (WCFO) than do control firms. This result continues to hold for ROE, but not ROA or WCFO, after controlling for economy‐wide growth.

Details

Managerial Finance, vol. 23 no. 5
Type: Research Article
ISSN: 0307-4358

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Article

Ankur Shukla, Sivasankaran Narayanasamy and Ramachandran Krishnakumar

The purpose of the paper is to explore the impact of board size on the accounting returns and asset quality of Indian banks.

Abstract

Purpose

The purpose of the paper is to explore the impact of board size on the accounting returns and asset quality of Indian banks.

Design/methodology/approach

This paper uses ordinary least squares regression, robust regression and panel data methods for estimation, based on data collected for a sample of 29 Indian banks that are listed on the National Stock Exchange (NSE) and form part of the NSE-500 index over a period of eight financial years 2009-2016. The data pertaining to the board size of the sample banks is collected from the annual reports of banks, whereas the data relating to return on assets (ROA) and ratio of the gross non-performing assets to total assets and control variables (bank age and bank size) is extracted from ACE Equity database.

Findings

This paper concludes that the size of the governing board has a positive impact on the accounting returns (measured through ROA) of the Indian banks. Further, board size is observed to be insignificant in determining the asset quality of Indian banks.

Originality/value

This paper contributes to the literature and practitioners in a number of ways. First, to the best of the authors’ knowledge, this is the first study on the impact of board size on the accounting returns and asset quality of Indian banks. The findings of the study contribute new theoretical insights to the body of knowledge on the influence of the size of the board, which may be useful for future researchers. Second, banks may enhance their financial performance by taking cognizance of the findings of this study. Finally, equity investors may make use of the findings of this article in deciding on whether to invest in a bank’s stock/lend to the bank based on board size of the bank.

Details

International Journal of Law and Management, vol. 62 no. 4
Type: Research Article
ISSN: 1754-243X

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Article

Andrews Adugudaa Akolaa

The international market entry strategy by acquisition is one of the critical options for success in international business. The decision to acquire a local firm is…

Abstract

Purpose

The international market entry strategy by acquisition is one of the critical options for success in international business. The decision to acquire a local firm is expected to impact the post-entry financial performance of the local firm as the acquirers come with proprietary advantages to improve the overall performance of the acquired company. The purpose of this paper is to empirically examine the post-acquisition financial performance of acquired foreign subsidiaries and comparable unacquired local firms in Ghana to determine the effect of foreign acquisition on the financial performance of the local subsidiaries.

Design/methodology/approach

A quantitative approach was adopted in this study. A sample of 100 locally acquired and non-acquired firms were studied using purposive and convenience sampling method. The research adopted the propensity score matching and the differences in difference methodologies to determine the returns on assets (ROA) of non-acquired local firms and acquired foreign subsidiaries are compared one year pre-acquisition t1 to two years post-acquisition t2.

Findings

The results demonstrate a higher post-acquisition financial performance of locally acquired foreign subsidiaries in relation to their local counterparts in Ghana. Firms with pre-acquisition modernized ownership structures performed better than state-owned firms and firms with high pre-acquisition absorptive capacity outperformed firms with lower pre-acquisition absorptive capacity. The results also indicate that ROA for acquired local firms in the year of acquisition drops in relation to the year prior to acquisition

Research limitations/implications

A major limitation of this research is that the relative capability of the parent companies and experience in the transfer of knowledge to the acquired local subsidiaries was not considered. The real impact of the various multinationals would have revealed how the capability and competencies of the different parent companies whose subsidiaries this study considered in the paper make a difference in their performance. The study did not also consider the value of parent company participation in the local management of the acquired subsidiaries. Whereas some acquired firms had parent company staff participating in the local management, others did not have same, thus challenging the performance results without any control of this variable. The other limitation of this research is the fact that it did not also consider the experience of the parent company as a factor that can influence the performance of the subsidiary. The more experienced the parent company is in engaging foreign markets, the more likely the support for the subsidiary will result in higher performance as parent company brings previous learnings. Another limitation of this study is that it measures the financials only (ROA) and hence does not provide a 360° assessment of the subsidiary performance, which includes the operational and overall subsidiary effectiveness. This research has not empirically examined all aspects of foreign acquisitions in Ghana and thus has many aspects for future exploration that other researchers may focus on. The paper has not considered the experience and capability of the parent company to transfer technology, innovation and all the advantages of multinationals to the post-acquisition performance of subsidiaries. More experienced multinationals are most likely to transfer knowledge faster to subsidiaries than less experienced ones, thus likely to show better performance post-acquisition than the less experienced ones. The effect of this phenomenon has not been considered in this study. Parent company participation in the local management of the subsidiary can also make a difference in the post-acquisition performance equation but this has not been considered in this research. Some parent companies actively participate in the local subsidiary management as management support for the subsidiary. This might have some effect on the subsidiary post-acquisition performance but this study does consider this. Other researchers may want to look into this factor. Future researchers may also assess the differences in performance of subsidiaries that are wholly owned and partial owned in Ghana. The performance of Greenfield joint ventures and local firm acquisitions can also be studied.

Practical implications

Findings of this research has implications for firms using acquisition as foreign market entry strategy to inform the choice of local partners to select for acquisitions as pre-acquisition ownership structure and absorptive capacity of local Ghanaian firms impact post-acquisitions performance. Ghanaian firms also seeking to attract foreign investments into their businesses will also find the results useful as they organize to meet prospective acquirers’ expectations, for example, building their human capacity and ownership structures, developing export and ensuring debt rations to attract potential acquirers.

Originality/value

Acquisitions as an international market entry strategy continue to gain grounds with lots of research in the area. However, there is scanty research on post-acquisition financial performance, especially in the developing country context, and this paper fills that yawning knowledge gap by comparing acquired and non-acquired local firms in Ghana to determine if foreign acquisitions lead to better ROA.

Details

International Journal of Emerging Markets, vol. 13 no. 5
Type: Research Article
ISSN: 1746-8809

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Article

Robert Neil Killins, David W. Johnk and Peter V. Egly

The purpose of this paper is to explore the impact of financial regulation policy uncertainty (FRPU) on bank profit and risk.

Abstract

Purpose

The purpose of this paper is to explore the impact of financial regulation policy uncertainty (FRPU) on bank profit and risk.

Design/methodology/approach

This study applies dynamic panel techniques and uses the Baker et al. (2016) FRPU index and macroeconomic variables to assess FRPU’s impact on bank profit and risk using Federal Deposit Insurance Corporation call reports from Q1 2000 to Q4 2016 for over 4,760 commercial banks.

Findings

The effect of FRPU on profitability (Return on Assets [ROA] and Return on Equity [ROE]) and risk (standard deviation of ROA and ROE) produces complex results. FRPU negatively (positively) impacts profits for small and large banks (money center banks). There is a positive impact on FRPU for small and medium-sized banks, with no impact reported for the large and money center banks.

Practical implications

Findings lead to several implications for financial services regulators, investors and executives as summarized in the conclusion. It is essential to ensure that clear communication channels are open especially to small and medium-sized banks for proper strategic planning, given their greater sensitivity to regulatory uncertainty.

Originality/value

This paper contributes to the literature as follows. First, it explores the impact of FRPU on bank profits and risk using a novel index introduced by Baker et al. (2016). This news-based continuous measure presents a bank profit modeling approach that differs from traditional event study methodology. Second, a large sample of US commercial banks is used which represents an important departure from banking regulation studies.

Details

Studies in Economics and Finance, vol. 37 no. 4
Type: Research Article
ISSN: 1086-7376

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Article

Omar Masood and Muhammad Ashraf

The purpose of this paper is to inspect whether bank‐specific and macro‐economic determinants influence Islamic banks' profitability in the selected countries of different regions.

Abstract

Purpose

The purpose of this paper is to inspect whether bank‐specific and macro‐economic determinants influence Islamic banks' profitability in the selected countries of different regions.

Design/methodology/approach

In order to achieve the study objective and to answer the question, the balanced panel data regression model has been used. Bank level data is used and this study examines the alternative measures ROA and ROE as a bank‐specific function and macro‐economic determinants.

Findings

The study results signify that banks with larger assets size and with efficient management lead to greater return on assets.

Originality/value

The paper shows that management efficiency regarding operating expenses positively and significantly affects the banks' profitability.

Details

Qualitative Research in Financial Markets, vol. 4 no. 2/3
Type: Research Article
ISSN: 1755-4179

Keywords

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Book part

Glenn Growe, Marinus DeBruine, John Y. Lee and José F. Tudón Maldonado

This paper examines the profitability and performance measurement of U.S. regional banks during the period 1994–2011, using the GMM estimator technique. Our study extends…

Abstract

Purpose

This paper examines the profitability and performance measurement of U.S. regional banks during the period 1994–2011, using the GMM estimator technique. Our study extends prior research by including several factors not previously considered using U.S. data.

Approach

We use bank-specific, industry-specific, and macroeconomic determinants of profitability contemporaneous with our performance indicators. We follow the accounting fundamental analysis path in explaining the bank performance.

Findings

Among the performance measures, the efficiency ratio and provisions for credit losses are negatively and equity scaled by assets is positively related to profitability. However, these relationships either reverse (efficiency ratio and provisions for credit losses) or become insignificant (equity scaled by assets) when the target becomes change in profitability. The level of nonperforming assets is negatively related to profitability across all measures of profitability used. Macroeconomic variables are largely unrelated to profitability during the year they are measured. However, they have a significant relationship with earnings change measures, suggesting they have a lagged effect on profitability. The slope of the yield curve is especially strong in this regard.

Originality

We use our determinants to model changes in bank profitability one year ahead, in addition to including several factors not previously considered, using the predictive focus of the fundamental analysis research.

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Article

I. Wayan Widnyana, I. Gusti Bagus Wiksuana, Luh Gede Sri Artini and Ida Bagus Panji Sedana

This study aims to analyze and explain the effect of financial architecture (with three dimensions: ownership structure, capital structure and corporate governance) and…

Abstract

Purpose

This study aims to analyze and explain the effect of financial architecture (with three dimensions: ownership structure, capital structure and corporate governance) and intangible assets on performance financial and corporate value in the Indonesian capital market.

Design/methodology/approach

This research was conducted on nonfinancial sector companies that were registered in the Indonesian capital market, namely Indonesia Stock Exchange (IDX) in 2015. This study used quantitative data and used secondary data sources, meaning that data were obtained, collected and processed from other parties. In this study, the hypothesis testing of the effect of financial architecture (included the dimensions of ownership structure, capital structure and corporate governance) and intangible assets on financial performance and corporate value using path analysis was performed.

Findings

The results of this study have provided findings that follow the research model that has been built (1) This research has been able to provide a theoretical model of the influence of financial architecture (with dimensions of ownership structure, capital structure and corporate governance), intangible assets, board processes on financial performance and company value in the Indonesian capital market. (2) To develop a theoretical model about the effect of corporate governance on financial performance in accordance with the two-tier system adopted by Indonesia. (3) An empirical study of the concept of financial architecture put forward by Myers (1999).

Originality/value

This research update lies in the research variable, which determines one value of the financial architecture variable comprehensively, combines the financial architecture variable and intangible assets to then be tested for its effect on company value and the use of the financial process variable as a board process as an intervening variable.

Details

International Journal of Productivity and Performance Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1741-0401

Keywords

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