Finance & Economics Review

Financial Ratios and Stock Price Predictability

2024-10-16T02:24:38+00:00

Purpose: This paper aims to investigate the applicability of financial ratios derived from financial statements to predict the stock prices of mobile telecommunication companies in Kuwait.

Methods: The pooled OLS regression method is used to examine the relationship between share prices (SP), as a dependent variable, against earnings per share (EPS), liquidity ratio (Liq), price to earnings (P/E) ratio, debt to equity (D/E) ratio, dividend yield (DY), and market to book value (M/B) ratio as independent variables.

Results: Pooled OLS regression revealed that EPS and Liq have a statistically significant positive relationship with share prices, while the debt-to-equity (D/E) ratio shows a significant inverse relationship with share prices. Other factors under study did not show any significant relationship with share prices.

Implications: The research results would help both investors and companies' top management identify the ratios that affect share price most. The results would help investors detect the factors that they should consider when making their investment decisions to improve their investment profitability and for the company's management to focus their efforts on improving these ratios to enhance shareholders' wealth.

Originality: This study is a pioneering attempt to address the effect of financial ratios on the share prices of mobile telecommunication companies in Kuwait.

Limitations: The relationship between financial ratios and share prices has been extensively researched and the results were very inconsistent which indicates that the effect of financial ratios on share price may vary from market to market.

Supplier Optimization Strategy, Risk Strategy and Enterprise Supply Chain Performance of SMEs

2024-09-20T15:29:24+00:00

Purpose: Small and Medium Enterprises (SMEs) in Bamenda City are integral to the region's economic development, contributing significantly to employment, innovation, and economic growth. Supply chain management involves the coordination and optimization of activities related to sourcing, production, and delivery of products and services. The main objective of this study was to investigate the effects of supplier optimization strategy and risk strategy on the enterprise supply chain performance of SMES in Bamenda City.

Methods: Data for this study was obtained with the help of a structured questionnaire. By combining both designs, the study can first describe the existing situation or relationships (descriptive), and then explore or test potential causes and effects (causal). The partial least square regression model was used to analyze the paper.

Results: Results from partial least squares structural equation models (PLS-SEM) revealed a positive insignificant effect of supplier optimization strategy on supply chain performance. Risk strategy was also found to exert a positive effect on supply chain performance everything being equal.

Implications: Although supplier optimization has a positive impact on supply chain performance, the effect is insignificant. This suggests that while the strategy is directionally sound, it may need to be enhanced or refined. Also, given the positive significant effect of the risk strategy on supply chain performance, organizations should continue to focus on and invest in risk management.

Efficiency of Insurance Companies in Cameroon

2024-09-23T14:12:46+00:00

Purpose: The main objective of this study is to assess the level of efficiency of insurance companies in Cameroon and to examine the role of corporate governance in explaining this level of efficiency.

Method: Using data extracted from the audited financial statements and reports of 15 insurance companies from 2010 to 2020, the study employs the output-oriented Malmquist index to measure the efficiency scores of non-life insurance companies in Cameroon. To examine the effect of corporate governance on the firms' efficiency levels, we used the panel Tobit model.

Result: Since insurance companies’ main mission is to protect against future risk occurrence while remaining financially viable, findings from data analysis revealed that the average efficiency level of sampled firms over the period of the study stands at 76.8%. Furthermore, results from the panel tobit analysis indicate that board gender diversity significantly enhances efficiency as well as board composition in terms of the number of foreigners on the board and ownership concentration measured by the number of shareholders compromise it. However, board size, presence of foreign executives, and foreign ownership were found to exert no significant effect on insurance companies in Cameroon.

Implications: The study therefore recommends that corporate governance and regulatory oversight be strengthened by implementing measures that will go a long way to enhance corporate governance practices and ensure compliance with best practices and standards within insurance companies in Cameroon. A performance analysis commission should be created within the regulatory organ to assess, rank, and recommend best practices to the insurance firms.

A Comparative Study of the Equal-Weight Method and Hierarchical Risk Parity in Portfolio Construction

2024-03-18T14:24:50+00:00

Purpose: Portfolio optimization is a process in which the capital is allocated among the portfolio assets such that the return is maximized while the risk is minimized. Portfolio construction and optimization has long been an active research area in finance. For the portfolios with highly correlated assets, the performance of traditional risk-based asset allocation methods such as, the mean-variance (MV) method is limited because quadratic optimizers require an inversion of the covariance matrix of the portfolio to distribute weight among the portfolio assets.

Methods: A possible solution to the limitations of traditional risk-based asset allocation methods can be provided by a hierarchical clustering-based Machine Learning method because it uses hierarchical relationships between the covariance of assets in the portfolio to distribute the weight, and inversion of the covariance matrix is not required. A comparison of the performance of a simple non-optimization technique called the Equal-weight (EW) method to the two optimization methods, the Mean-variance method and the HRP method, which is a machine learning method, was conducted in this research.

Results: It was found that in terms of cumulative returns, the equal-weight method has outperformed several more sophisticated optimization techniques, the mean-variance method, and the HRP method. For most of the period, the Sharpe ratio of the HRP method was observed to be similar to the mean-variance method and equal-weight method.

Implications: This research supports the idea that HRP is a feasible method to construct portfolios with correlated assets because the performance of HRP is comparable to the performances of the traditional optimization method and the non-optimization method.

The Impact of Financial Repression on the Economy of Bangladesh

2024-04-04T15:55:34+00:00

Purpose: The study's objective is to examine the impact of financial repression on Bangladesh's economy. Moreover, the impact of individual policy tools such as real deposit rate, interest rate restriction, capital account control, share of state-owned commercial bank in total advances, and statutory liquidity ratio will be investigated to find the specific policy that hampers economic activities.

Method: The autoregressive distributed lag (ARDL) method, originated by Pesaran and Shin (1999) and expanded by Pesaran, Shin, and Smith (2001), will be used to look at the long-term relationship. The study uses time series data for Bangladesh's economy from 1973 to 2022.

Results: The findings of the ARDL approach confirm that repressive policies reduce economic growth over the sample period, and the effect becomes weaker after liberalizing the foreign exchange market. However, among the repressive policies, interest rate restrictions, statutory liquidity ratio, and the share of the state-owned bank in the commercial banks have significant adverse effects on economic growth.

Implication: Policymakers should take proper measures to liberalize the financial sector to boost economic activity. The interest rate restrictions, which are already in effect and hamper the fair functioning of the loan market, should be withdrawn.

Cross Country Study of Human Capital Formation and USFDI Inflows

2024-04-24T16:24:08+00:00

Purpose: The neo-classical theory of economic growth features the positive impact of the human capital of an economy on its growth. The inflow of foreign direct investment is one of the main components to carry forward the growth effect, this study investigates the impact of country-specific institutional quality and human capital on the cross-country variations of US-Foreign Direct Investment (FDI) inflows. Our core hypothesis is that Countries with better Human capital will attract more FDI if they have good quality institutions in terms of less risk in investment opportunities.

Method: Using a set of panel data of US-Foreign Direct Investment (FDI) inflows for both developed and developing countries over the period 1984-2021.

Result: The country-specific quality of institutions reinforces the impact of human capital on the inflow of US foreign direct investment in this study. Using two-dimensional panel data we find strong support for our hypothesis using a two-way fixed effects model. Our results are robust to the alternative measures of institutional quality.

Implications: The strength of our approach is that in contrast to the previous works (1) we have used the USFDI inflow across countries that have been widely neglected in the related literature and (2) emphasis has been given to the conditional or joint impact of human capital and country-specific institutional quality in determining the cross-country variations in USFDI inflows.

Nexus between Economic Policy Uncertainty and Bank Liquidity Creation

2024-06-24T14:11:31+00:00

Purpose: This paper analyzes the effects of economic policy uncertainty (EPU), bank regulations, and credit risk on the asset and liability sides of liquidity creation in developed and developing countries.

Methods: The sample comprises 100 companies in developed and developing countries from 2015 to 2021. We used a dynamic Generalized Method of Moments (GMM) estimator to test the hypothesis. We also performed the Sargan test of over-identification or J-statistics to check the validity of instruments in the GMM model. Additionally, we conducted a robustness test on our analysis based on average assets and average capital.

Results: We find that Economic Policy Uncertainty (EPU) significantly negatively impacts asset-side liquidity creation in developed and developing countries. However, EPU significantly positively impacts liability-side liquidity creation only in developed countries. Interestingly, higher credit risk can effectively counteract the adverse effects of EPU on asset-side liquidity creation and encourage a positive impact on liability-side liquidity creation in developed and developing countries. Moreover, stricter bank regulations, including activity restriction and capital stringency, can weaken the negative effects of EPU on asset-side liquidity creation in developed and developing countries. However, we do not find any significant effect of higher bank regulations on the relationship between liability-side liquidity creation and EPU.

Implications: Since financial institutions can make riskier decisions to keep their businesses going in an uncertain economy, regulators need to act in advance to restore confidence in credit growth and financial resilience. The government should assess the short-term and long-term consequences of any policy implications.

Originality: While most studies concentrate on total liquidity creation from a cross-country perspective, our study provides new evidence by breaking down liquidity creation into asset-side and liability-side liquidity creation and examining the research separately in developed and developing countries.

Determinants of Islamic Banks' Profitability in an Emerging Economy

2024-08-27T15:24:19+00:00

Purpose: This study investigates the factors influencing the profitability of Sharia-based Islamic banks operating in Bangladesh.

Methods: Using panel data from 2017 to 2023, the current analysis shows how factors particular to individual banks have impacted the profitability of Bangladeshi banks. To complete this analysis, only Islamic banks are taken into consideration. In this paper, the factors that affect Bangladesh's Islamic banking industry's profitability are clarified. 10 Islamic banks operating in Bangladesh are included in the sample. The study investigates internal factors such as size, liquidity risk, operational effectiveness, credit risk, financial risk, and capital adequacy. The analysis is conducted using panel data regression with fixed effect.

Results: The result shows that operating efficiency, financial risk, and liquidity risk are the most relevant bank-specific characteristics in determining the Islamic banks’ profitability in Bangladesh.

Implications: The study suggests that bankers should keep a close observation of credit and liquidity risk indicators, diversify their revenue streams, and minimize expenses. Moreover from the regulatory perspective, the performance of the banks should be evaluated based on their operational efficiency and ability to generate profit. The policy direction will be directed towards enhancing resilience by reducing the risk internally and increasing the efficiency of the Islamic banks to intensify the robustness and stability of this sector.

Originality: While numerous previous studies have provided various explanations of the factors influencing bank profitability, this research specifically examines the internal factors affecting the profitability of Islamic Banks in Bangladesh, an emerging market.