Journal of Accounting and Finance

Covenant Strictness Measures

Jianglin Dennis Ding, Alan Witt — Wed, 14 Aug 2024 00:00:00 -0400

Covenants are crucial components of loan agreements, designed to protect lenders by imposing various restrictions and obligations on borrowers. Despite extensive empirical research on covenant strictness, a universally accepted measure of covenant strictness remains elusive. Existing metrics tend to include only a limited selection of covenants from the comprehensive contract. This study utilizes loan-level credit risk data to evaluate and rank the effectiveness of several widely used covenant strictness measures. Credit risk at the loan level is assessed through two primary methods: the difference between issue ratings and issuer ratings, and the loan credit spread while controlling for fixed effects at the firm level. This approach allows for a more nuanced comparison and provides insights into which measures most accurately reflect covenant strictness and its impact on credit risk. The findings aim to contribute to a better understanding of covenant effectiveness, offering potential improvements for future loan contract structuring and risk assessment practices.

Does IPSAS Implementation Promote Financial Accountability in a Local Government Authority? — A Case Study of the City of Windhoek

Veronique Van Rooi, Daniel W. Kamotho — Wed, 14 Aug 2024 00:00:00 -0400

The study aimed to assess the perception as to whether IPSAS is effective in promoting financial accountability in a local government authority following their implementation. A quantitative approach and descriptive research design was used for this study using structured questionnaires for data collection. The study finds evidence to support that implementation of IPSAS positively correlates with enhancing accountability in financial reporting for a local government authority. Further, the study recommends effective strategies that could be used by policymakers, senior central and local government management to enhance the effectiveness of IPSAS in promoting accountability in financial reporting, such as stakeholder’s engagement, external support needed, and transformation in structure and law necessary for successful implementation of IPSAS in a local government set up.

The Active Versus Passive Investing Debate: Evidence From the 2018-2023 Market Cycle

Dale Prondzinski, Mitchell Miller — Wed, 14 Aug 2024 00:00:00 -0400

The paper investigates the research question: Which investment management style, active or passive, produced better risk-adjusted performance from January 1, 2018, to December 31, 2023 (Prondzinski, 2010)? The comprehensive time period was further subdivided into two periods: January 2020 – May 2023, the Pandemic period, and March 2022 – December 2023, the interest rate hiking period without any interest rate cuts. The study tested twenty-seven hypotheses derived from this research question for the specified periods addressed.

The study, consisting of 27 statistical tests, found that on a risk-adjusted basis, the Sharpe ratios of active indices (proxies for active management) significantly exceeded the passive indices (proxies for passive management) in nine of the periods tested) (Prondzinski, 2010).

Industry Effects in the Dividend Initiation Decision

Wei Huang, Donna L. Paul — Sun, 15 Sep 2024 00:00:00 -0400

We examine industry effects on the likelihood and level of dividend initiations. Results suggest that firms incorporate industry expectations for dividend levels and growth into the initiation decision. They are in general less likely to initiate a dividend if dividend levels in the industry are high or growing. Firms that do initiate seek to match industry peers in initiation levels. We also find that announcement returns to dividend initiating firms are lower when more industry peers are dividend payers and when industry dividend growth is high. Together, these results provide support for an industry equilibrium dividend policy.

Does Denomination Influence Pastors’ Readiness for Retirement? Evidence From Southern California Pastors

Seongcheol Paeng, Daniel Park — Sun, 15 Sep 2024 00:00:00 -0400

This study explores retirement issues among pastors. Recent studies indicate that many pastors work past retirement age due to financial unpreparedness. We examine whether retirement preparedness and job satisfaction vary by denomination. We focus on three key retirement concerns: retirement comfort, overall job satisfaction, and financial satisfaction. Using survey data from Southern California pastors, we find that Methodist pastors are more prepared for retirement compared to others, while Presbyterian pastors are less content with their roles than other denominations. However, denomination does not significantly affect the financial satisfaction of pastors.

Investor Perception of Corporate Social Irresponsibility (CSiR) and Investing Decisions

Janis K. Zaima, Marianne Marar Yacobian, Frances Turner — Wed, 18 Sep 2024 00:00:00 -0400

The study examines a behavioral finance paradigm, where investors incorporate emotional/expressive and financial factors. The impact of emotional ties to the firm’s products and an expressive factor such as corporate social irresponsibility (CSiR) are examined to determine whether their investment decisions are based on them. We find that investors make decisions that are wealth maximizing as well as emotional/expressive. Moreover, we find that our respondents believe corporate profits should not come from using the cheapest labor nor from engaging in CSiR behavior, and they would be less likely to invest in such a firm.

Investing in Timberlands Versus the S&P 500: Which Investment Outperforms?

Jason Brown, K. Michael Casey, Mark McMurtrey — Wed, 18 Sep 2024 00:00:00 -0400

Investing money has been a popular way to build wealth for generations. It benefits not only the investor, but society as a whole. Companies are able to use these funds to invest in capital equipment, labor, and new production techniques. This paper shows an analysis involving the investment in timberland as a way to increase one’s fortune. The lead author is employed in the timberland industry on a daily basis, and their insights are presented from a ground-level view. Risks and benefits are discussed, and a comparative analysis of investing in timberland versus the S&P 500 Index is outlined.

Founders’ Characteristics and Startups’ Funding Opportunities Around the Globe

Artem Malinin — Wed, 18 Sep 2024 00:00:00 -0400

In this paper, I investigate the eleven largest startup markets in the world to uncover whether female founders have a disadvantage in the amount of funding received by their respective startups. I am also interested in whether country-level factors such as the level of development and quality of formal and informal institutions can impact the results. Moreover, I research founders with formal technical education to show if they have any advantage while funding their startups.

I investigate more than 3,500 international startups during the period of 2017-2022 while utilizing CrunchBase database. I uncover that female founders are at a disadvantage in funding for their startups in all 11 countries of interest. Such results are more pronounced in developed countries, those with better functioning formal institutions and more individualistic populations. The disparity between male and female-led startups’ funding is especially pronounced in debt financing as well as seed round of equity financing. The technical education of male and female founders does not provide any advantage in terms of the funding opportunities.

Teaching Case: An Inventory Valuation Dilemma for Financial Statement Reporting

Carlos Rodriguez, D. R. Rodgers-Tonge, N. U. Shahid — Wed, 18 Sep 2024 00:00:00 -0400

Using Accounting Standards Update (ASU) 2015-11: Inventory (Topic 330), Simplifying the Measurement of Inventory from the Financial Accounting Standards Board (FASB), and Auditing Standards (AS) 2801: Subsequent Events from the Public Company Accounting Oversight Board (PCAOB), this case study creates critical thinking and ethical decision-making. The assignment requires students to consider inventory valuation given a hypothetical scenario under a triggering event. The case integrates fictitious actors and other components that can be tailored for teaching adaptation. It requires students to assume the role of the participants, while considering how management and auditors could arrive at different standard interpretation.

A Hierarchical-Dealer-Centric Model of FX Swap Valuation

Elham Saeidinezhad — Fri, 25 Oct 2024 00:00:00 -0400

This paper constructs a model of foreign exchange (FX) swap valuation based on dealers’ behavior and the hierarchy of the global dollar funding system. International investors use these currency derivatives to synthetically fill their US-dollar funding gaps. In this model, three attributes of market structure drive the valuation of FX swaps: market-making costs (measured by dealers’ bid-ask spreads), dollar funding liquidity risk (measured by CIP deviation and market imperfections), and FX swap market liquidity (measured by dealer competition). The goal is to understand how market design influences the cost of US dollar funding and its spillover effects. FX dealers are vital institutions in this ecosystem, as their balance sheets connect national monetary systems to the global dollar funding markets. For currencies with low FX turnover, central banks act as market makers, while private banks serve as dealers for currencies with the highest FX turnover. Studying the “dollar funding gap” through the lens of FX swap dealers is a crucial aspect often overlooked in international finance scholarship.

How Do Institutional Investors Perceive Mandatory ESG Disclosure: Evidence From SEC’s Mandatory Climate Change Disclosure Proposal

Martin M. Kim — Fri, 25 Oct 2024 00:00:00 -0400

This study examines how institutional investors perceive the SEC’s mandatory climate change disclosure proposal, announced on March 21, 2022. The findings show that investors of US public firms with higher institutional ownership react less negatively to the proposal despite overall negative market reactions. Additional tests show that the main results hold even if an endogeneity concern and greenhouse gas contributors’ effect were tested with the cross-sectional regression models. This research sheds light on the lack of consensus on the impact of institutional investors on ESG disclosure for US public firms, providing evidence that institutional investors contribute to the long-term sustainability and value creation of portfolio firms.

Exploring the Association Between Chief Executive Remuneration and Financial Performance: A South African Banking Perspective

Lesley Netshituka, Natasha Robbetze, Ronel Cassim — Fri, 25 Oct 2024 00:00:00 -0400

This research aimed to determine whether there is an association between financial performance and chief executive officer (CEO) remuneration when South African banks are sampled. A quantitative research approach was applied using a descriptive research design. The research included a data range spanning over 10 years. Financial data were collected through the Integrated Real-time Equity System (IRESS). Multiple regression testing was performed using the Statistical Package for Social Science (SPSS). Correlation coefficients were measured, and multiple regression models were constructed. This study found that cashflow per share, market price per share and liquidity ratios were often identified as predictors of CEO remuneration. This research contributed to the body of existing knowledge by demonstrating that the remuneration paid to South African bank CEOs can be predicted by means of selected financial ratios. Limitations included that the census was small and only consisted of eight banks in total. This limitation was accommodated by expanding the time frame for data collection.

Risks, Resilience and Performance of Financial Mechanisms During the Health Crisis

Rene Santenac — Fri, 25 Oct 2024 00:00:00 -0400

Is there an “optimal resilience” model for organizations? Due to its status, the company is de facto concerned and regularly confronted with the constraints of the environments in which it operates. The latter are juxtaposed with regulatory, institutional and recently totally unprecedented health constraints. The antagonism of the « Risk/Return » couple on which financial theories are based is a model that has imposed itself in the terms of exchange between the bank and the company, thus resulting in a persistent informational asymmetry. But the repetition of financial shocks and the violent health crisis that occurred in January 2020 on a planetary scale forced the two parties to review their strategies. In this context, many systems have been put in place to enable organizations to stay on course. In particular, the loans guaranteed by the State distributed by the banks, which are at the same time active by the device and passive to bear the risk. Nevertheless, the banking sector has been able to develop in recent years a powerful architecture of operational resilience to fight against crises. What about the operational resilience model of companies that are suffering this double blow of external financial and health constraints for which they were not prepared? How these organizations were able to use financial devices for their profits. This is the analysis that is made under the triple report of effectiveness, efficiency and equity. Operational, theoretical and empirical resilience should also be analyzed. Theory to confront models of resilience. Empirical to analyze the reality of a given geographical area in order to identify a result. It emerges that the first « Toxi-Handler » (catalysts of their own suffering) are business leaders, a triple approach based on observation: individual, organization, means.