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The crux of bank accounting is how to measure and disclose ex ante credit risk, as loan yields and cost of funds are determined by managerial effectiveness and the financial market. This paper examines how the practice of setting up provisions for loan losses by bank managers had changed to preserve regulatory capitals around the 2008 financial crisis. This paper examines the empirical relationship between ex ante credit loss, which is proxied by loan losses provisions, and realized credit loss, which is measured by net charge-off. The empirical relations are examined before, during, and after the 2008 financial crisis to find the patterns of prediction errors of the incurred loss model. This paper obtains evidence that the empirical relation between non-performing assets and provisions for loan losses weakened at the time of a financial crisis. The relations of net charge-offs and allowance for loan losses on provisions for loan losses amplified during a financial crisis by accounting design. After the financial crisis is over, the empirical relation between non-performing assets and provisions for loan losses does not return back to the pre-crisis relation, but to a different, new post-crisis relation. This paper obtains evidence that financially stable banks in terms of the tier 1 capital ratio, return on assets, market-to-book ratio, or dividend payout ratio tend to adjust provisions for loan losses in a larger scale in response to a financial crisis than less stable banks.

Advocates of blockchain claim widespread impact will be forthcoming shortly. However, the path of innovation in blockchain is uncharted. Investors will assess where blockchain innovation will profit first and most. The timing and impact of each blockchain innovation is a key consideration for business managers. Link, Ruhm, and Siegel (2014) suggest private equity investments forecast which innovations are likely to succeed. Previous research on private equity gives insight on why that ownership structure is especially successful. Private equity investments are collected for two periods and categorized according to basic blockchain components, basic cryptocurrency payment components, and decentralized applications, particularly applications in financial services. The results suggest investors have acted prudently, investing strongly in building blocks, payment systems and fundamental applications, showing a primary emphasis on refining blockchain and realizing standard blockchain protocols before investing in highly complex applications. Further, financial services applications dominate, suggesting investors see financial services as far and away the most likely industry for imminent deconstruction.

To improve audit reports' transparency and information content, China implemented new auditing standards in 2017.  The standards, which include disclosing key audit matters, were applied to A+H share companies in 2017 and A-share companies in 2018.  This paper uses A+H-share companies as the experimental group and A-share companies as the control group and applies the difference-in-differences method to test the market response to the new auditing standards.  We find a statistically significant positive cumulative abnormal return (CAR) during the report release event window for the A+H share companies.  The results indicate a greater investor reaction to the release of audit reports under the new standards implying that the audit reforms enhanced the information of the reports.  Furthermore, the positive CAR indicates that the reports reassured investors that the audit did not reveal significant problems or that existing weaknesses were addressed.  We also found a statistically insignificant difference in the volatility of stock prices during the event window for the experimental and control group. 

We examine the security and firm characteristics of a sample of 2,027 non-convertible investment grade floating rate securities (bonds) issued by the US based firms between 1980 and 2018. These bonds pay a coupon based on short term reference rate, such as fed funds rate, plus a fixed quoted margin. Considerable number (81.6%) of these issues are between 1992 and 2007 signifying floating rate as an effective mechanism to mitigate firm’s interest rate risk when the rates are high and expected to fall. A positive and significant abnormal return (CAR = 0.27%), in the event window surrounding issue date, provides strong evidence that the floating rate is viewed as a less restrictive provision as compared to the call option. Majority of the issues (89.3%) are non-callable since the floating rate mitigates interest rate risk for the issuing firm. Lack of put provision in these bonds (in only 7.35% of the sample issues) signifies no significant investor concerns of falling bond prices. Regression analysis reveals that firms with growth options and with higher leverage experience positive CAR due to the financial flexibility these bonds provide. Firms with higher level of information asymmetry benefits less from issuing these securities since most of these bonds (90.13%) are issued at par therefore, the price is not likely to carry information content that mitigates information asymmetry between the firms and the investors.

This paper describes how behavioral biases influence the resolution of financial covenant violations. Prior literature documents that violation waivers are common; however, there is a lack of discussion on the determinants that lead loan officers to waive covenant violations. We rely on the escalation of commitment bias (or the sunk cost phenomenon) to discuss how loan officers may become attached to a selected course of action and fail to incorporate new information, increasing the likelihood of covenant waivers. We explain the implications of this bias on bank financial reports by detailing how accounting links loan quality to bank financial statements. We further draw on the psychology literature to offer potential solutions to mitigate overcommitment in the context of loan officers. Future research can examine the extent to which loan officers knowingly or unknowingly steer away from rational decision-making. This study has practical implications as users of bank financial reports, including investors, auditors, examiners, and bank managers, learn about processes and challenges on how accounting mechanics link bank loan portfolios to financial statements.

The purpose of this paper is two folds: (i) obtain the overall technical efficiencies (TE), pure technical efficiencies (PTE), and scale efficiencies of the Islamic bank of the nine South and Southeast Asian (SSEA) countries during 2011-2016. (ii) compare them among the Islamic banks of the SSEA. The paper applied the Bootstrap Data Envelope Analysis (DEA) for obtaining three efficiencies in the production of loan and earning assets and found that the average TE, PTE, and SE of the Islamic banks in the region were 77.3 percent, 81.2 percent, and 95.3 percent respectively. The comparison of PTE efficiencies across the Islamic banks found: (i) the average TE of the Islamic banks of Malaysia was 81.9 percent and was higher than the average of other countries in the region; (ii) the average managerial efficiency (PTE) of the Islamic banks of Malaysia, excluding Brunei, Singapore, and Thailand, was 87.0 percent and was higher than the average of other countries in the region; (iii) among countries of the South and Southeast Asia, excluding Singapore and Maldives, the Islamic banks of Pakistan were more scale efficient than other countries in the region. The average scale efficiency of Pakistan’s Islamic banks was 96.8 percent. The underlying reason for the Islamic banks of Malaysia and Pakistan most efficient in the region is because they were the forerunners. They were the first countries to introduce Islamic banks. Secondly, the banks of counties survived through competition with conventional banks operating side by side in the Islamic banks. The policy prescription suggests that bank regulators allow the opening of more Islamic banks to compete with conventional banks for improving PTE efficiency.

Using a large sample of U.S. firms during 1987–2011, we find robust evidence that the issuance of seasoned equity is associated with abnormally high future stock price crash risk. The association between seasoned equity offerings and crash risk is stronger among offerings that involve the sale of secondary shares (existing shares sold by insiders or large blockholders). We also find that recent seasoned equity issuers are far less likely to experience sudden positive price jumps relative to firms that have not recently issued equity. Our findings of elevated crash risk and diminished jump risk, when taken together, are consistent with a heightened propensity for firms to hoard bad news but not good news when issuing equity.

This paper researches the impact that shadow banking in China has upon credit creation and the potential effectiveness of monetary policy. Using a credit creation model, we derive the effect that shadow banking has upon the money multiplier and the money supply. The model shows that shadow banking can change the money multiplier, potentially increasing it during an expansion and decreasing it during a contraction. Introducing shadow banking in a CC-LM model results in a shift of the CC and LM curves resulting in a higher equilibrium output. A vector autoregressive model is used to empirically estimate the impact of shadow banking deposits' growth rate on the growth rates of the broad money supply, GDP, and the CPI. The results show that shadow banking's credit creation function in China has a pro-cyclical characteristic, potentially reducing the money supply's controllability and increasing the difficulty in effectively regulating monetary policy. This paper introduces shadow banking into the currency creation process of traditional commercial banks, accounting for the reserve requirement ratio, the excess reserve ratio, the shadow bank leakage rate, and the reserved deduction rate. Future research can determine whether coordinating monetary policy and leverage ratio regulation mitigates the impact of shadow banking. Another area of research is how the shadow banking of non-financial companies affect monetary policy.

We document frequency distribution of 4315 two-party, non-equity alliances undertaken by the U.S. based firms between 1986 and 2015 in 11industries and find that on an aggregate basis, the firms which form multiple alliances based on the exploitation motive are as likely to enter into alliance as the firms that enter into multiple alliances based on the exploration motive. However, we find strong evidence that the firms that enter into alliances on three or more occasions are driven by the exploration motive while, the firms that enter into alliances one and one or two times are driven by the exploitation motive.  The average cumulative abnormal returns (ACAR) for all of the three subsamples of firms that undertook one, one or two, and three or more alliances during the time period for this study are all positive but exhibit a declining trend.  Firms that are larger in terms of total assets engage more frequently in alliances than smaller firms.  Returns to firms that enter into three or more alliances are sensitive to the leverage employed and the likelihood of bankruptcy whereas returns to firms that enter into only one or one or two alliances are affected significantly by the considerations of competitive forces.

The object of this study is to explore the effect of cultural distance on both the long run and short run performance of cross border mergers and acquisitions undertaken by Indian acquiring firms. We utilize buy and hold returns (BHAR), cumulative abnormal returns (CAR) and cross-sectional regression analysis in our study. Adopting the traditional Hofstede measure of cultural distance and other pertinent variables, commonly used to measure cultural differences, we document a negative and statistically significant influence of cultural distance on Indian cross-border M&As and corroborate some of other findings reported in prior research. Also, we find that the BHAR is nevertheless higher when the acquisitions are friendly, paid for 100% cash, and the acquiring firm is large, older and belongs to a business group. The inclusion of the variable ‘business group’ along with industry relatedness and acquirer size provides valuable insights into the Indian cross border acquisition landscape, wherein business groups dominate to a great extent.

This paper investigates whether false confidence, as characterized by a high level of personal mastery and a low level of intelligence (IQ), results in frequent investor trading and subsequent investor wealth erosion across time. Using the National Longitudinal Survey (NLSY79), change in wealth and asset allocation across time is modeled as a function of various behavioral, socio-economic and demographic variables drawn from prior literature. Findings of this research reveal that false confidence is indeed a predictor of trading activity in individual investment assets, and it also has a negative impact on individual wealth creation across time.

This study aims to evaluate the effect of regulatory corporate governance mandates on the valuation of equity-issuing firms in the U.S. Using a matched sample, we examine how the Exchange Listing Requirements, specifically, and the Sarbanes-Oxley Act (SOX), generally, affect IPO valuations. Board structure compliance provides no consistent valuation benefit. We find some evidence of negative effects for firms whose board structure is significantly altered by Reform and among small firms. The absence of increased valuations post-Reform suggests that there is little to offset the loss of private control benefits that Reform represents (post-Reform insider ownership and founder involvement are lower) and, thus, at the margin, Reform creates incentives for some firms to stay private. While the 2012 JOBS Act reduced the burden of registration, reporting and accounting requirements of SOX for small firms, it did nothing to change the board structure requirements of these firms. The results of this study together with those of Wintoki (2007) and Rhodes (2018) suggest that regulations pertaining to the board structure requirements of small equity-issuing firms should either be modified to allow more flexibility or repealed altogether. If lawmakers ultimately relax these requirements, future studies may focus on changes in board structures, private benefits of control, and the rates at which firms access public equity markets.

Mid-cap funds invest in stocks with a market cap between $2 billion and $10 billion. Some of the mid-cap firms recently overcame their small-cap status, but are still in the high growth mode with a better market positioning and stronger balance sheet. Because of their size and status, mid-cap stocks offer a unique platform to portfolio managers of mid-cap funds to earn superior returns by using their selectivity skills. This study analyzes the performance and persistence of performance of 257 U.S. domiciled retail mid-cap funds from January 2000 to December 2017. The results of this study suggest that despite the interesting platform offered by these stocks, it is not easy for fund managers to pick the stocks that beat the market. The results of this study show that mid-cap funds do not outperform the market and their poor performance persists over time.

There have been three major tax cuts in the modern US history: 1) the Tax Cuts and Jobs Act of 2017; 2) the Economic Growth and Tax Relief Reconciliation Act of 2001; and 3) the Economic Recovery Act of 1981. Each of the first two major tax cuts had increased the federal debt. Just about everybody agrees that US federal debt is on an unsustainable path. Can we afford another major tax cut without trigging a major economic disaster such as the Great Recession of 2007-2009? This article discusses an overview of this new law, the impact of the first two major tax cuts on the federal debt, the impact of the Tax Cuts and Job Acts on the US government debt, and its consequences.

Using intraday trading data during the 2008 financial crisis, from the Standard and Poor’s Depository Receipt (SPDR) market, we test for evidence of the informational advantage of traders. In addition, we examine the effect of pricing error on trade price. If traders are rational, and have accurate information, they will only purchase an asset at a premium (discount) if they have reason to believe that the fundamental value of that asset will increase (decrease). Our results show that the trading price of the SPDR does not significantly predict the movement of underlying asset values. This finding is consistent with traders overreacting to disparities between price and underlying value during the financial crisis.

This study utilizes hand-collected ownership data to re-examine the signaling, agency and wealth effect theories in a matched-sample of initial public offerings (IPOs) issued in the U.S. prior to and following the passage of the Sarbanes-Oxley Act of 2002 (SOX). SOX provides some motivation for revisiting these topics because evidence exists that it may have affected the types of firms going public and ultimately the relatively importance of adverse selection and moral hazard, the asymmetric information problems with which these theories are concerned. Results on both the pre- and post-SOX samples are consistent with the signaling theory and evidence of a wealth effect exists in both eras. However, in contrast to results of studies conducted prior to SOX, both the pre- and post-SOX results give little credence to the agency theory, suggesting that SOX has not impacted investors’ concerns regarding moral hazard. Rather, the difference between the pre-SOX results and the results of previous studies suggests that SOX appeared to reduce moral hazard concerns only through its effect on the self-selection of firms going public.

Nowadays, one of the leading factors used in the evaluation of a country’s economic development is energy consumption. Because of economic growth, demand for energy is also increasing. In this study, the emerging European countries’ (the Czech Republic, Poland, Romania, Turkey) and the CIS countries’ (Kazakhstan, Russia, Ukraine, Uzbekistan)  electricity consumption has been forecasted for five years period (2015-2019). In the study, GM(1,1) Rolling Model, which is developed in the framework of Grey System Theory is used as a mathematical model for real-time forecasting. The results of the study show that there will not be a significant change in electricity demand in this two area during the 2015-2109 period. 

This paper investigates how firms shifted their dividend policies and leverage policies in response to the economic shock caused by the 2008 financial crisis. The sample countries are United States, Great Britain, France, Germany, Australia, Japan, China, and Korea. The empirical relationship of firms’ dividend policies with their capital structures and earnings was likely to undergo a major change around the 2008 financial crisis, as firms adjusted their capital structures and dividend policies in response to the extreme credit crunch caused by the financial crisis. The extent and the speed that firms deleverage themselves and reduce their dividends were likely to be influenced by countries’ cultural and social norms. This paper finds a significant reduction in dividends across sample countries except Great Britain and France after the 2008 crisis. This finding supports the free cash flow theory that dividends are paid to dissipate free cash flow to address agency conflicts between managers and shareholders. This paper finds a higher correlation between dividends and leverages before the 2008 crisis, and that it strengthened after the crisis except Great Britain and Korea. This finding is consistent more with the pecking order theory than with the trade-off theory of leverage.

A nascent literature in finance and accounting on tail risk in individual stock returns concludes that bad news hoarding by corporate managers engenders sudden, extreme crashes in a firm’s stock price when the bad news is eventually made public. This literature finds that firm-specific crash risk is higher among firms with more severe asymmetric information and agency problems. A hitherto disjointed literature spanning the fields of international business, finance, and accounting suggests that geographic dispersion in a firm’s operations, and especially dispersion across different countries, gives rise to organizational complexities and greater costs of monitoring that can exacerbate asymmetric information and agency problems. Motivated by the confluence of arguments and findings from these two strands of literature, this paper examines whether stock price crash risk is higher among multinational firms than domestic firms. Using a large sample of U.S. headquartered firms during 1987-2011, we find robust evidence that multinational firms are significantly more likely to crash than domestic firms. Moreover, we show that the difference in crash risk between multinational and domestic firms is most acute among firms with weaker corporate governance mechanisms, including weaker shareholder rights, less independent boards, and less stable institutional ownership. Our analysis indicates that stronger monitoring from each of these three governance mechanisms significantly attenuates the positive relation between crash risk and multinationality. Our findings are robust to the use of alternative measures of crash risk and to controlling for known determinants of crash risk identified in prior studies. Our study offers new insights that should hold value for scholars and market participants interested in understanding the implications of heighted agency problems that multinational firms are likely to encounter and scholars and market participants interested in developing models that more accurately predict tail risk in the equity returns of individual firms.

Over the past fifty years, economic growth in emerging markets has been supported by investments in capital and technology from the developed world. The benefit of this development for the emerging markets, as measured by growth in income, employment, and wealth, is immediately apparent. There have also been significant advantages for the developed world through opportunities for higher risk adjusted returns from investments in emerging markets. This study explores the benefits of the diversification of global government bond portfolio, and provides complete performance evaluations of DMs with or without South Africa emerging market (SAEM) bonds. The study examines the benefits of inclusion of SAEM bonds in DMs, the degrees of financial integration among the research markets, the relative bond returns of dynamic factor models with time-varying coefficients and the robust tests of bond portfolio performance between DMs with SAEM and bond index. The results of this study provide important implications for global investors by identifying diversification gains in SAEM.