ACRN Journal of Finance and Risk Perspectives
Vol. 5, Issue 1, MARCH 2016, ISSN 2305-7394
TABLE OF CONTENTS
ENTERPRISE RISK (MIS)MANAGEMENT - PERFORMANCE IMPLICATIONS OF THE MISAPPLICATION OF RISK CAPACITY
Christopher R. Myers 1
1 Manchester Business School, University of Manchester
Abstract: The study assesses the relationship between enterprise risk management (ERM) and risk tolerance to determine if there is evidence of operational efficiencies as a result of implied well structured, optimal risk tolerances. Current ERM research suggests that firms which adopt ERM obtain a holistic perspective of their risk profile, and make better decisions with resource allocation and risk strategy in contrast to companies that have not fully adopted ERM. However, these studies generally lack a discussion of how risk tolerances and ERM are related, and that this relationship can determine the effectiveness of ERM. Using a sample of 110 US publicly listed insurance companies, a two stage step-wise regression process is used to provide evidence to support this idea. We show that one reason for ERM user successes is that their ERM frameworks facilitate an alignment of risk tolerances to risk capacity, a subtle, yet essential aspect of the ERM process. When this alignment is established we see stronger operational efficiencies across ERM-user firms with well structured risk tolerances relative to those firms where such structures are in question.
IS BASEL THE RIGHT GATEWAY FOR A MORE EFFICIENT DEBT MARKET? AN INTERNATIONAL COMPARISON
Elisabetta Castellan 1, Guido Max Mantovani 2
1 Ca’ Foscari University
2 H.E.R.M.E.S. Universities & Ca’ Foscari University
Abstract: Current literature doISes not agree on the impact that Basel regulation is having onto the banking system, small and medium size enterprises (SMEs) and the single country economies. Moreover, recent crises cast some doubts on the efficacy of the regulation itself. With this paper, we investigate this issue by comparing the credit allocation capabilities of different countries. In particular, we compare two Anglo-Saxon Countries (the USA and the UK) with a group of eight European Countries where Basel rules are fully implemented. We find that, without the competition of well-developed risk capital markets, Basel regulation struggles to be effective.
Keywords: SMEs financing, Basel regulation, Ratings, Certainty Equivalent. JEL classification: G32, M10, G28
AMBIGUITY OF GOODWILL REGULATIONS - A CASE OF POLISH PUBLICLY TRADED ENTERPRISES
Ewa Wanda Maruszewska 1, Marzena Strojek-Filus 2
1 University of Economics in Katowice, Department of International Accounting
2 University of Economics in Katowice, Department of Accounting
Abstract: Because goodwill appears as a consequence of consolidation process as well as business combinations, it is a regular item in statements of financial position prepared by modern entities. Polish publicly traded companies are obliged to follow international or Polish accounting standards that both include regulations referring to goodwill. Although Polish standard-setters are aiming at accounting harmonization, Polish legislature is not fully converged with international standards. Moreover, international standards are not precise enough to oblige accounting professionals to act in a certain way when measuring goodwill. Freedom of action arising from ambiguity of choices should be used in a way to achieve relevance and faithful representation of financial information. Through the analysis of European Union and Polish accounting regulations authors suggest that legal foundations of goodwill disclosure and measurement should be more detailed. A survey conducted among Polish publicly traded companies acknowledges that goodwill is a complicated item in financial reports and that is why accounting professionals should pay more attention to disclosed information in order to achieve fundamental qualitative characteristics. Authors’ contribution into the modern accounting literature is twofold. First, authors call for a greater attention to significance of information about goodwill, especially on economic substance of goodwill disclosed in financial reports, verifiability, understandability, and a risk regarding changes in estimates included in goodwill valuation process. Second, the importance of right teaching methods is pointed out in order to stress that arithmetical calculations following legal regulations of goodwill are not satisfactory for faithful representation of economic substance of goodwill.
Keywords: goodwill, business combinations’ accounting, IFRS 3, Polish accounting
EFFECTS OF MANAGERS’ INDIVIDUAL VALUES ON COMPANY’S PERFORMANCE: THE CASE OF FRANCE
Louai Ghazieh 1, Bahram Soltani 2
1 University of Paris I Sorbonne
2 Associate Professor and Research Director at the University of Paris I Sorbonne
Abstract: The values of managers occupy a prominent place in the scientific research.The role played by individual values in decision making within the company is less clear. Despite this attention, this study examines the relationship between managers' individual values and the company's performance.Based on a sample of 1202 Frenchmanagers, this study aims to explain the system of managers' individual valueswithin the French company SBF120. A questionnaire was sent to 1,202 senior managerial leaders.
Our results highlight the existence of a positive relationship between the individual preferences of managers for competence, moral and social values and company's performance. This study should have academic and practical contributions particularly for managers seeking to improve the companies’ practices and organizational functioning within capital market economy.
Keywords: Manager, company's performance, individual values, value system, financial crisis.
RESPONSIBILITY OF CORPORATE MANAGER: TO SYNTHESIZE OF THE DIFFERENT THEORIES BY ECONOMIC, POLITICAL, SOCIAL AND BEHAVIORAL PERSPECTIVES
Louai Ghazieh 1, Bahram Soltani 2
1 University of Paris I Sorbonne
2 Associate Professor and Research Director at the University of Paris I Sorbonne
Abstract: Following the high profile financial scandals of 2007-2008, corporate management hAs been faced with strong pressures resulting from more regulatory requirements, as well as the increasing expectations of various groups of stakeholders. The responsibility acquired a big importance in front of this financial crisis. This responsibility requires more transparency and communication, inside the company with the collaborators and outside of the company with the society, while companies try to improve the degree of control and to authorize managers to realize the objectives of the company. The objective of this paper is to present the concept of the responsibility generally and the various types of manager’s responsibility in private individual within the company, as well as the explanatory theories of this responsibility through the various perspectives such as: economic, political, social and behavioral. This study should have academic and practical contributions particularly for regulators seeking to improve the companies’ practices and organizational functioning within capital market economy.
Keywords: Manager, accountability, corporate performance, financial crisis, behavior.
COMPARING THE PRECISION OF DIFFERENT METHODS OF ESTIMATING VAR WITH A FOCUS ON EVT
Majid Mazloum Bilandi 1, Janusz Kudła 2
1 Ph.D. Candidate in Economics, University of Warsaw, Faculty of Economic Sciences
2 Prof. dr hab. University of Warsaw, Faculty of Economic Sciences
Abstract: The paper aims to conduct a comprehensive research in sphere of risk measurement. This study would like to determine the forecasting precision of different risk estimation tools through implication of popular methods e.g. parametric and non-parametric methods in this field and more fresh and complicated methods e.g. semi-parametric methods and finally confirming the results with exploiting backtesting methods. Design/methodology/approach – The paper opted for a quantitative approach of measuring VaR. Estimating VaR by implying 8 different methods then comparing the obtained results based on backtesting criterion. We put into examination 6 major international stock exchange indices e.g. Canadian TSX, French CAC40, German DAX, Japanese Nikkei, UK FTSE100 and US S&P500 from 03-June-2003 to 31-March-2014 meanwhile we used rolling-window technic for backtesting purpose. The data were obtained from Yahoo! Finance. Findings – The paper empirically determined extend to which, the aforementioned methods are reliable in estimating one-day ahead VaR. we find out that EVT and HS are the two most precise methods albeit at very high confidence levels the EVT produces the most accurate forecasts of extreme losses. Results of this study encouraged financial managers to turn from using traditional methods of risk measurement to more fresh and reliable one such as EVT method of estimating VaR. Originality/value – This paper fulfills need to a comprehensive study of different proposed methods of measuring risk and showed the estimated VaR of them in a readily comparative manner.
Keywords: VaR, HS, GARCH (1, 1), EGARCH, GJR-GARCH, AGARCH, DCC-MGARCH, FHS, EVT, Simulation Technique.
INVESTORS’ SENTIMENTS AND INDUSTRY RETURNS: WAVELET ANALYSIS THROUGH SQUARED COHERENCY APPROACH
Mobeen Ur Rehman 1, Syed Jawad Hussain Shahzad 2
1,2 Lecturer, COMSATS Institute of Information Technology, Islamabad, Pakistan
Abstract: This study for the first time explores the time frequency relationship between investors’ sentiments and industry specific returns. A sentiment index proxy is constructed using level and lag values of six indicators of investors’ mood swing through Principle Component Analysis. The data on investors’ sentiments and nine major industry’s returns is used from 2001 to 2011. Wavelet Coherency analysis reveal that investors’ sentiments and industry returns are significantly related and are in phase (cyclical). An optimistic view of the investors regarding an industry’s performance results in higher returns and pessimistic view results otherwise. The relationship is significant on 0 8 and 32 64 months scale. Financial and energy crises play major role in the sentiment led industry’s return. These findings are unique and were not possible through the traditional econometric estimates.
Keywords: Investors’ sentiments, stock returns, wavelet analysis
THE IMPACT OF CORPORATE GOVERNANCE AND EARNINGS MANAGEMENT PRACTICES ON COST OF EQUITY CAPITAL: EVIDENCE FROM THAI LISTED COMPANIES
Supawadee Sukeecheep Moss 1
1 Accounting School, Business Administration and Information Technology Faculty, Rajamangala University of Technology Suvarnabhumi, THAILAND
Abstract. The significant impact of recent, and often high-profile, corporate accounting scandals, is often attributed to earnings management and factors surrounding cost of equity capital. Understanding the relationship between these factors is important for both the management of corporations and for the confidence of their investors. The main of objective of this paper is to examine the influence of earnings management and corporate governance on the cost of equity capital in listed companies in Thailand and determine their impact, which could be used to initiate strategies to restore investor confidence. Earnings management in this paper is measured from the absolute value of discretionary accruals that are calculated from five different models. Corporate governance variables in this paper include board interlocking, board independence, board size, CEO-Chair duality, audit committee financial expertise, audit opinion, managerial ownership and institutional shareholders. The CAPM and Industry Adjusted Earnings to Price ratio model are used as a proxy for the cost of equity capital in this paper. To test the influence of these factors, a fixed-effect panel data regression model is applied. The results reveal that companies with higher earnings management, higher proportion of managerial ownership, institutional ownership, CEO-Chair duality and which receive modified audit opinions are likely to have higher cost of equity capital. In contrast, the companies that have higher proportion of board independence, audit committee financial expertise and board interlocking are likely to have lower cost of equity capital.
Keywords: board-interlocking, board independence, modified Jones
PROBABILITY OF DEFAULT IN CORPORATE ECONOMIC DISTRESS, OR WHAT RISK DOES MARKET REWARD?
Valery Shemetov 1
1 Northern Virginia Community College
Abstract: The article suggests a quantitative model describing development of a corporate economic distress when a firm is not burdened with a long-term debt yet. The model introduces new variables related to the crisis dynamics, market trend and volatility, and corporate features. For the economic distress left unattended and for the recovery stage when the firm tries to restore its stability, the probability of default as a function of time and problem parameters is given, and the distance to default and the point of no return for launching a recovery program are estimated. The model helps select the program minimizing the probability of default over a set of available recovery programs. For a steady developing corporation, it is estimated how much money can be withdrawn from the business for dividend payments and other needs without exposing the corporation to an extra risk of default. In the approximation of firms having no long-term debt, the model demonstrates the limits of validity of the Capital Assets Pricing Model. (JEL G30)
Keywords: Corporate Economic Distress; Recovery Program; Probability of Default; Distance to Default; Sustainable Corporate Development; CAPM
FINANCE, RISK AND ECONOMIC SPACE
Victor Olkhov 1
Abstract: This paper presents new approach to financial modeling and forecasting that is based on economic space notion. Economic space is defined as generalization of risk ratings and allows boost methods and description of financial processes. Risk ratings of economic agents are treated as coordinates of economic agents on economic space. Economic and financial variables of separate economic agents determine macroeconomic and financial variables as functions of time and coordinates on economic space. That permits describe financial relations similar to mathematical physics equations. Financial models can be described on discreet and continuous economic spaces with dimension determined by number of major risks measured simultaneously. To show advantages of economic space usage to financial modeling we present extension of Black-Scholes-Merton equation on n-dimensional economic space; develop macroeconomic models on economic space in a way similar to hydrodynamics and derive financial wave equations.
Keywords: risk ratings, economic space, option pricing, financial wave equations.
LONG – TERM SUSTAINABILITY OF PORTFOLIO INVESTMENTS – GENDER PERSPECTIVE: AN OVERVIEW STUDY
Vladimír Mariak 1, Ľudmila Mitková 2
1,2 Faculty of Management, Comenius University in Bratislava, Department of Economics and Finance
Abstract: Financial market is the place where a supply of financial products and a demand for financial products are crossing. Financial institutions are standing on the supply side, and potential client on the demand side. The mentioned crossing is seen in a financial portfolio. The client is purchasing a product for some purpose (insurance, mortgage, etc.), the financial institution or a financial advisor/broker should be helpful in the phase of creating a client’s portfolio. By offering the product to client it is necessary to know his/her needs first. In this article we assume that the needs analysis is the inevitable part of a client's portfolio building process. Firstly to reach the concept of long – term sustainability and secondly that this process should be done by taking into account possible gender based differences.
Keywords: Gender, Long – term sustainability, Portfolio Investments, Risk
MODELS OF DETECTION OF MANIPULATED FINANCIAL STATEMENTS AS PART OF THE INTERNAL CONTROL SYSTEM OF THE ENTITY
Zita Drábková 1
1 Ph.D., Department of Finance and Accounting, Faculty of Economics, University of South Bohemia in České Budějovice
Abstract: Accounting remains the main source of information about the company for most users of financial statements. At the same time, the creators and users of financial statements want to get the best quality and quantity of information as far as possible. Although users of financial statements are unable to obtain with absolute certainty statements that are true and fair, they need to know how much they can rely on financial statements. This paper deals with reducing the information asymmetry, especially on the part of users of financial statements. The paper analyses selected models of the detection of manipulated financial statements as a possibility to reduce the risk of accounting fraud and use as part of an internal control system of an entity or as a management tool for corporate governance or internal auditors. A risk analysis was performed on selected models; the Beneish model, the CFEBT model, the Jones Non discretionary Accruals model and selected bankruptcy models to detect accounting frauds in specific case studies of selected accounting unit.
Keywords: financial statements, fraud, fair and true view of accounting, detection of the risk of manipulating financial statements.