Risk disclosure, cost of capital and bank performance

2016 ◽  
Vol 24 (4) ◽  
pp. 476-494 ◽  
Author(s):  
Shamsun Nahar ◽  
Mohammad Azim ◽  
Christine Anne Jubb
Keyword(s):  
Banking Sector ◽  
Cost Of Capital ◽  
Equity Capital ◽  
Bank Performance ◽  
Risk Disclosure ◽  
Reporting Standard ◽  
Content Type ◽  
And Performance ◽  
The Cost ◽  
Corporate Risk

Purpose This study aims to examine the relationship among corporate risk disclosure, cost of equity capital and performance within banking institutions in a developing country setting. The authors argue that corporate risk disclosure reduces the cost of capital as investors attain better information and have confidence in the business and that less risk disclosure may generate ambiguity for potential stakeholders. Design/methodology/approach This study uses the population of all 30 listed banks on the Dhaka Stock Exchange, Bangladesh, for the years 2006 to 2012 and uses three-stage least-squares simultaneous equations to deal with endogeneity issues. Findings There is evidence that Bangladesh has voluntarily adopted the International Financial Reporting Standard 7 – Financial Instruments: Disclosures (IFRS 7) and Basel II: Market Discipline and that these standards enhance risk disclosure even where compliance is not compulsory. The cost of capital is found to be negatively associated with risk disclosure, which has an inverse relationship with bank performance. Originality/value This study provides a link between risk disclosure, cost of capital and performance. It fills a gap in the literature by providing a longitudinal study of risk disclosure in the banking sector of Bangladesh. This research also highlights the importance of appropriate risk disclosure for banks and suggests its importance in the process of fulfilling stakeholders’ demands.

Ethical values and bank performance: evidence from financial institutions in Malaysia

2020 ◽  
Vol 11 (1) ◽  
pp. 233-256
Author(s):  
Tuan Azma Fatiema Tuan Ibrahim ◽  
Hafiza Aishah Hashim ◽  
Akmalia Mohamad Ariff
Keyword(s):  
Banking Sector ◽  
Positive Association ◽  
Annual Reports ◽  
Bank Performance ◽  
Ethical Values ◽  
Return On Assets ◽  
Content Type ◽  
And Performance ◽  
The Relationship

Purpose The purpose of this study is to investigate the relationship between ethical values and performance in the context of the banking sector in Malaysia. Design/methodology/approach Based on the philanthropic model, this study posits that firms undertaking zakat and charity are ethical firms. Zakat disclosure index (ZDI) and charity disclosure index (CDI) were constructed to measure ethical values. This study hypothesises that ethical values are positively associated with bank performance. Ethical values (i.e. CDI and ZDI) and financial performance data (i.e. return on assets) were collected from the disclosures made in the annual reports of 50 banks for a period of five years (2010-2014). Findings A positive association was found between zakat disclosure and bank performance. The results indicate that higher zakat disclosure is associated with greater bank performance. However, no relationship was found between charity disclosure and bank performance. Research limitations/implications Considering the limitation of the index used in this study, other dimensions such as corporate governance, sustainability, products and environment can be considered in the development of index to measure ethical values in future studies. Originality/value This study offers additional explanation on the relationship between ethical values and performance by examining the role of zakat disclosures that characterize the unique aspects of Malaysian companies.

Corporate governance and cost of equity: empirical evidence from Latin American companies

2016 ◽  
Vol 16 (5) ◽  
pp. 831-848 ◽  
Author(s):  
Emanuele Teti ◽  
Alberto Dell’Acqua ◽  
Leonardo Etro ◽  
Francesca Resmini
Keyword(s):  
Corporate Governance ◽  
Latin American ◽  
Cost Of Capital ◽  
Negative Relationship ◽  
Developed Countries ◽  
Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
The Cost ◽  
The Relationship

Purpose This paper aims to investigate the extent to which corporate governance (CG) systems adopted by Latin American listed firms affect their cost of equity capital. Several studies on the link between the two aforementioned dimensions have been carried out, but none in the context of Latin American firms. Design/methodology/approach A CG index is created by taking into account the peculiarities of each country and the recommendations given by the corresponding CG institutes. In particular, to assess the level of CG quality, three sub-indexes have been identified: “Disclosure”, “Board of Directors” and “Shareholder Rights, Ownership and Control Structure”. Findings The results indicate a negative relationship between CG quality and the cost of equity. In particular, the “Disclosure” component is the one mostly affecting the cost of equity. Research limitations/implications This study contributes to the literature by adding knowledge on the relationship between CG and cost of capital considering, for the first time, the overall Latin American market. Practical implications The paper proves that institutional investors all over the world are disposed to pay a premium to invest in firms with effective CG standards; moreover, this premium is higher in emerging countries such as those analyzed in this paper, rather than in developed countries. Originality/value To the authors' knowledge, this is the first paper empirically investigating the relationship between CG and cost of capital in Latin America.

Can investing in corporate social responsibility lower a company's cost of capital?

2014 ◽  
Vol 31 (2) ◽  
pp. 202-222 ◽  
Author(s):  
Marcelo Cajias ◽  
Franz Fuerst ◽  
Sven Bienert
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Cost Of Capital ◽  
Task Force ◽  
Equity Capital ◽  
Content Type ◽  
Starting Point ◽  
Corporate Social ◽  
The Cost ◽  
A Company

Purpose – This paper aims to investigate the effect of corporate social responsibility (CSR) ratings on the ex ante cost of capital of more than 2,300 listed US companies in a panel from 2003 to 2010. It examines whether financial markets value continuous investment in CSR activities through higher market capitalization and lower cost of capital. Design/methodology/approach – The measure of the cost of capital reflects the perceived riskiness of individual companies expressed in the unobserved internal rate of return that investors expect to hold a risky asset. Based on descriptive portfolio estimations, panel and quantile regressions, the authors model the cost of equity capital as a function of CSR strengths and concerns obtained from the KLD-database and accounting controls. Findings – The authors show that firms' CSR strategies differ significantly across industry sectors. Customer-orientated companies such as telecommunications and automobile outperform asset-driven sectors such as real estate or chemical companies. Furthermore, the authors find a 10-bp positive effect for one standard deviation of firms' intensive allocation of resources in sustainable activities. Research limitations/implications – Since the authors are interested in the effect environmental, social and governance activities have on the firm's perceived market valuation rate, the authors apply the Fama-French model because of its efficiency in explaining realized returns, rather than incorporating analyst's long-term growth forecasts into the proxy for the equity premium. Practical implications – Managers of companies with low or intermediate CSR scores may consider the financial benefits of improving their social and environmental performance. A good starting point is usually to draw up a company-wide CSR agenda, possibly guided by a dedicated CSR task force, mapping out the potential costs and benefits of such measures. In addition, by improving their CSR ratings, a company may get access to additional resources, ranging from the growing ethical investment industry to employees for whom CSR performance matters when choosing an employer. Originality/value – The authors expand the existing literature by considering firm's CSR level to be in relation to the overall CSR performance and decompose firm's CSR agenda into strengths and concerns rather than counting the number of activities a firm is involved in. The applied methodology allows a better understanding of firm's CSR agenda and its implication for capital markets and investors on both long and short investment terms.

Risk governance and performance: a developing country perspective

2016 ◽  
Vol 31 (3) ◽  
pp. 250-268 ◽  
Author(s):  
Shamsun Nahar ◽  
Christine Jubb ◽  
Mohammad I Azim
Keyword(s):  
Significant Relationship ◽  
Global Financial Crisis ◽  
Developed Countries ◽  
Risk Governance ◽  
Bank Performance ◽  
Risk Disclosure ◽  
Content Type ◽  
Return On Equity ◽  
And Performance ◽  
The Global Financial Crisis

Purpose – The purpose of this paper is to investigate the association between risk governance and bank performance in a country where disclosure of risk information is virtually voluntary. Design/methodology/approach – Using 210 bank-year observations comprising hand-collected data for the period 2006-2012, the study uses regression analysis to test whether a significant relationship exists between risk governance and banks’ accounting- and market-based performance. Findings – This paper investigates risk governance in terms of risk disclosure, number of risk committees and existence of a risk management unit, controlling for other corporate governance variables. Accounting-based performance is measured by return on equity and return on assets; market-based performance is measured by Tobin’s q and buy-and-hold returns. The results show that there is a significant relationship between risk governance and bank performance measures used in this study. Research limitations/implications – This paper complements the governance literature by incorporating agency and neo-institutional theory to provide robust evidence that risk monitoring and management are associated with bank performance, which has become extremely important following the global financial crisis (2007-2008). Practical implications – Empirical evidence in this paper suggests that risk governance characteristics can be used as channels to improve bank performance. In addition, stakeholders may find these results useful in selecting their preferred bank. Originality/value – The uniqueness of this paper lies in its country setting. Most studies on governance and performance involve developed countries. This paper’s contribution is to examine the association of risk governance characteristics for both accounting-based and market-based performance in a developing economy setting, with virtually voluntary compliance mechanisms in place.

scholarly journals The effect of risk disclosure on the cost of equity capital and firm value (An empirical study of manufacturing companies listed on the Indonesia Stock Exchange period 2015-2017)

2019 ◽  
Vol 9 (2) ◽  
pp. 133
Author(s):  
Eka Sri Sumardani ◽  
Rr Sri Handayani
Keyword(s):  
Firm Value ◽  
Stock Exchange ◽  
Equity Capital ◽  
Manufacturing Companies ◽  
Cost Of Equity Capital ◽  
Risk Disclosure ◽  
Cost Of Equity ◽  
Net Profit ◽  
The Cost ◽  
Corporate Risk

This study examines the effect of corporate risk disclosure on cost of equity capital and firm value. It uses the ratio of market value to book value, the ratio of leverage, consumer price index, growth, firm size, independent audit committee, and net profit during the study period and net profit in the previous year as control variables. The population consists of all manufacturing companies listed on the Indonesia Stock Exchange for the period 2015 - 2017. The sample was taken using a purposive sampling method, with the total sample of 99 companies. The data were analyzed using multiple regression analysis to test the hypothesis. The results indicate that corporate risk disclosure has a negative effect on the cost of equity capital but corporate risk disclosure has a positive effect on firm value.

The relation between excess control and cost of capital

2014 ◽  
Vol 10 (1) ◽  
pp. 93-114 ◽  
Author(s):  
Yves Bozec ◽  
Claude Laurin ◽  
Iwan Meier
Keyword(s):  
Firm Value ◽  
Design Methodology ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Equity Capital ◽  
Content Type ◽  
The Common ◽  
Cash Flow Rights ◽  
The Cost ◽  
The Relationship

Purpose – The purpose of this study is to investigate the relationship between dominant shareholders, whose voting rights exceed cash flow rights (excess control), and firms’ cost of capital, including both equity capital and debt. Design/methodology/approach – This research is conducted in Canada over a four-year period from 2002 to 2005 and uses panel data of 155 S&P/TSX firms. The weighted average cost of capital is regressed on excess control using fixed-effect regressions in a two-stage least squares framework. Findings – The paper finds evidence that the cost of capital increases with excess control. The paper also confirms that for firms incorporated under the less protective Quebec incorporation law the excess control and, therefore, cost of capital is higher than for firms incorporated in the other provinces under the common law regime. Originality value – Prior work examined the relationship between excess control and firm value, mostly Tobin's Q. By using cost of capital, the study explores another channel through witch excess control may affect firm value.

Impact of the cost of capital on the financing decisions of Brazilian companies

2015 ◽  
Vol 11 (3) ◽  
pp. 285-307 ◽  
Author(s):  
Tatiana Albanez
Keyword(s):  
Capital Structure ◽  
Cost Of Capital ◽  
Market Timing ◽  
Shareholder Wealth ◽  
Equity Capital ◽  
Cost Of Equity ◽  
Pecking Order ◽  
Content Type ◽  
Financing Decisions ◽  
The Cost

Purpose – The purpose of this paper is to examine the market timing behavior of listed Brazilian companies to verify the effects of the cost of capital on their financing decisions, and hence on their capital structure. Design/methodology/approach – The relation between the cost of capital (debt and equity capital) and the leverage of firms in the period from 2000 to 2011 is analyzed by means of regression models with panel data. For this purpose, different proxies are used for the cost of equity and debt capital. Findings – The results provide strong evidence that Brazilian firms take advantage of windows of opportunity to obtain financing, and that when the cost of equity capital is high, firms appear to follow a pecking order, giving preference to debt financing. However, the decision is based on the cost of alternative sources of funding rather than just on the hierarchy established by the pecking order theory, due to the information asymmetry between market agents. Originality/value – Few studies of the Brazilian capital market have analyzed firms’ capital structure under the market timing approach, and none have addressed the same aspects analyzed here. Therefore, this paper will be useful to different users of accounting information by indicating the factors that influence the capital structure of Brazilian firms, allowing a better analysis of whether these firms act to maximize the generation of shareholder wealth.

Performance implications of board size, composition and activity: empirical evidence from the Indian banking sector

2017 ◽  
Vol 17 (3) ◽  
pp. 466-489 ◽  
Author(s):  
Manas Mayur ◽  
Palanisamy Saravanan
Keyword(s):  
Emerging Economies ◽  
Banking Sector ◽  
Size Composition ◽  
Curvilinear Relationship ◽  
Bank Performance ◽  
Board Size ◽  
Content Type ◽  
And Performance ◽  
Indian Banks ◽  
The Impact

Purpose The purpose of this paper is to examine the performance implications of board size, composition and frequency of board meetings on the performance of banks. Design/methodology/approach The performance of banks is assessed on various parameters such as return on assets (ROA), Tobin’s Q, non-performing asset ratio (NPA ratio) and the net write-off ratio (NWO ratio). The effects of changes in board size and composition and frequency of meetings on the performance of banks are investigated using feasible generalized least square (FGLS) estimation of panel data covering a time span of five years concerning 40 banks incorporated in India. Frequency of board meetings is taken as a proxy for board activity and involvement. The authors have also tested for endogeneity issues in the model. Findings A curvilinear relationship was found between the board size and performance of banks. The authors have modelled a cubic form of the relationship for Indian banks. The authors’ findings indicate that an increase in board size is associated with better bank performance within both low and high board size ranges. Alternatively, increased board size is negatively associated with bank performance in the intermediate board size range. The study did not find any significant relationship between performance and frequency of board meetings and board composition. Research limitations/implications The behavioural variables reflecting the involvement of the board have not been incorporated in the model to determine the impact of board involvement on the performance of banks owing to the availability of data. It is hoped that this paper will be useful for major regulatory bodies such as the Ministry of Corporate Affairs (MCA), Securities and Exchange Board of India (SEBI), Company Law Board (CLB) and stock exchanges in India and other emerging economies in devising listing norms and other governance-related aspects. Originality/value Non-linear relationships between the board size and performance are not normally prevalent in emerging economies, especially in the banking sector. However, such a relationship exists among the Indian banks. This paper is the first of its kind to identify and address the same.

scholarly journals Ownership type, bank models, and bank performance: the case of the Yemeni banking sector

2018 ◽  
Vol 67 (8) ◽  
pp. 1271-1289 ◽  
Author(s):  
Fekri Ali Mohammed Shawtari
Keyword(s):  
Performance Indicators ◽  
Banking Sector ◽  
Bank Performance ◽  
Ownership Type ◽  
Content Type ◽  
Return On Equity ◽  
Significant Performance ◽  
And Performance ◽  
The Impact ◽  
Ownership Types

Purpose The purpose of this paper is to examine bank performance using the different performance measures, namely, return on assets, return on equity and bank margins (MAR). Design/methodology/approach Unbalanced panel data were constructed to test the related hypotheses and provide evidence on the relationship between ownership types, banking models and performance indicators adopting the random effects techniques. Findings The findings of the paper substantiate that the banking models are significant performance indicators. However, the results are contingent on the GDP growth of the country. Moreover, the evidence indicates that the impact of ownership types is inconclusive in all measures of performance. However, the GDP is significant when it interacts with the types of ownership, particularly for foreign and government banks, although the evidence is mixed and unfavourable for government banks. Practical implications The results of the study provide insights for bankers and policymakers to enhancement Yemen’s banking sector. Originality/value This study is considered as the first attempt in examining the role of banking model and ownership type and their link to banking model.

The impact of globalization on the performance of Banks in South Africa

2016 ◽  
Vol 26 (4) ◽  
pp. 517-542 ◽  
Author(s):  
Fadzlan Sufian ◽  
Fakarudin Kamarudin
Keyword(s):  
South Africa ◽  
Host Country ◽  
Banking Sector ◽  
Generalized Method Of Moments ◽  
Estimation Method ◽  
Bank Performance ◽  
Content Type ◽  
Multinational Banks ◽  
Dynamic Panel Regression ◽  
The Impact

Purpose This paper aims to provide empirical evidence for the impact globalization has had on the performance of the banking sector in South Africa. In addition, this study also investigates bank-specific characteristics and macroeconomic conditions that may influence the performance of the banking sector. Design/methodology/approach The authors use data collected for all commercial banks in South Africa between 1998 and 2012. The ratio of return on assets was used to measure bank performance. They then used the dynamic panel regression with the generalized method of moments as an estimation method to investigate the potential determinants and the impact of globalization on bank performance. Findings Positive impact of greater economic integration and trade movements of the host country, while greater social globalization in the host country tends to exert negative influence on bank profitability. The results show that banks originating from the relatively more economically globalized countries tend to perform better, while banks headquartered in countries with greater social and political globalizations tend to exhibit lower profitability levels. Originality/value An empirical model was developed that allows for the performance of multinational banks to depend on internal and external factors. Moreover, unlike the previous studies on bank performance, in this empirical analysis, we control for the different dimensions of globalizations while taking into account the origins of the multinational banks. The procedure allows us to test for the home field, the liability of foreignness and global advantage hypotheses to deduce further insights into the prospects of banking across borders.

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