Market discipline in the behavioral finance perspective: a case of Sharia mutual funds in Indonesia

Purpose This study aims to determine antecedents of market discipline. A model was constructed by extending the theory of planned behavior (TPB) to explore the cognitive, psychological and social factors that influence the market discipline in the form of withdrawal behavior. Design/methodology/approach This study applied a quantitative approach by surveying 181 Indonesian retail investors in Sharia mutual funds, which were represented by civil servants. The samples were collected using the purposive sampling technique. This study used the partial least square–structural equation model to analyze the data. Findings The results revealed that the Islamic financial literacy, the attitudes toward withdrawal, the subjective norms and the perceived behavioral control had a positive significant effect on the withdrawal intention, whereas financial risk tolerance had an insignificant impact. Then, all the exogenous variables and intention to withdraw had a significant contribution in explaining market discipline. Contrary to the proposed hypothesis, the attitude toward withdrawal had a negative impact on market discipline. The structural model indicated that the TPB could be extended by adding some exogenous variables (i.e. Islamic financial literacy and financial risk tolerance) in determining the intention to withdraw and withdrawal behavior, which indicated the market discipline in Sharia mutual funds. Research limitations/implications This study was limited to individual investors who work as civil servants. This study did not accommodate different demographic factors such as age and gender, which influence fund withdrawal behavior. Practical implications The government must focus on the inclusion of market discipline in Sharia mutual funds’ regulation to encourage the risk management disclosure, specifically that related to Sharia compliance. Originality/value Previous studies applied a traditional finance theory to predict market discipline, but this study contributes to filling the theoretical gap by explaining the market discipline from a behavioral finance perspective that was found in Sharia mutual funds.

ISLAMIC BANKING MARKET DISCIPLINE IN INDONESIA

This paper examines the market discipline of Islamic banks, as manifested by the responses of depositors with regard to their deposits and profit-sharing ratio to the fundamentals of the banks in the case of Indonesia. We analyse the supply and demand function of deposits using panel data from 10 Islamic banks from 2010 Q1 to 2019 Q4. We empirically find that market discipline in Indonesian Islamic banks is relatively weak, and conjecture that this is for two reasons. First, religious depositors have driven the unusual behaviour of Islamic banks, as we find that they stay with the same bank, even if it has poor fundamental conditions. Second, the profit and loss sharing mechanism means that Islamic bank depositors do not have great flexibility in demanding a higher rate relevant to the risk they must bear. This is because depositors' actual return is set to be consistent with the actual profit obtained from the banks' lending activities. Our results lead to the call for policymakers to effectively monitor the fundamental conditions of Islamic banks and to collaborate with agencies and organisations that promote Islamic bank development in Indonesia.

Market Discipline in the Interbank Market: Evidence from an Emerging Country

This study provides one of the first evidence of the market discipline in the interbank market of the Vietnamese banking system after the global financial crisis. Based on the data of 19 commercial banks listed in Vietnam from 2010 to 2019, our empirical results suggest a weak interbank discipline in the Vietnamese banking system. Banks seem to be interested in the liquidity ratio of their fellows, especially for smaller banks, whereas they pay more attention to asset quality in the case of larger banks. We believe our study is of interest to regulators and policymakers in Vietnam

Three essays on economic consequences of new accounting regulation and bank accounting

This dissertation comprises three distinct chapters. The first chapter examines whether accounting quality improves for firms voluntarily adopting IFRS by using a single country setting of Swiss firms. The Swiss setting enables isolating the effect of the change from accounting standards from changes in reporting enforcement. I find that voluntary adopters exhibit significant improvement in accounting quality metrics in the post-adoption period. Classifying the adopters in non-serious or serious adopters based on their actual reporting changes around the adoption, I find that the non-serious adopters do not face accounting quality improvements in the post-adoption period. Overall, the evidence points towards the explanation that accounting quality is mainly shaped by reporting incentives. The second chapter examines the new Expected Credit Loss (ECL) model’s impact on the predictability of loan loss provisions (LLP) and potential market discipline consequences. I examine whether the arguably less objective LLP under IFRS 9 obscure market participants’ ability to monitor the banks’ risk-taking incentives. The empirical findings suggest a decrease in the association between loan loss provisions and the incurred loss model determinants in the post-IFRS 9 period, i.e., LLP are based less on objective determinants after IFRS adoption. Furthermore, I find a decrease in the sensitivity of leverage to changes in risk in the post-adoption period of IFRS 9, indicating an attenuated market discipline over banks’ risk-taking. In contrast, I find no changes in the determinants of LLP and market discipline for the benchmark sample of U.S. banks, which were not subject to similar accounting changes during the sample period. The third chapter examines whether banks change the accounting designation of derivatives after ASU 2017-12. I investigate the impact of the new standard on earnings volatility within different groups of derivative users. Using detailed quarterly data on financial derivatives for bank holdings, I find that the level of earnings volatility and the ASU 2017-12 influence the banks’ decisions to use hedge accounting. In assessing the impact within groups of derivative users, I find evidence that banks that designate derivatives for hedge accounting purposes exhibit a lower level of earnings volatility around the adoption of ASU 2017-12 as opposed to banks that elect not to apply hedge accounting. I also find that banks that elect to use hedge accounting for the first time after adopting the standard update exhibit decreased earnings volatility. Overall, the findings confirm the FASB’s initial intention of introducing the accounting standard’s update.