Journal of Risk and Financial Management

This paper focuses on returns comovements in global stock portfolios including the US Dollar as a defensive asset. The main contribution is the selection of a large set of macroeconomic and financial variables as potential drivers of these comovements and the emphasis on the predictive accuracy of proposed econometric models. One-year US Expected Inflation stands out as the most important predictor, while models including a larger number of variables yield significant predictive gains. Larger forecast errors, due to parameters instabilities, are documented during major financial crises and the COVID-19 pandemic period. Some research directions to improve the forecasting power of econometric models are discussed in the concluding section. Full article

The increasing importance of environmental, social, and governance (ESG) factors has sparked scholarly interest in how company reputation influences stock market investment decisions. Most ESG research has focused on secondary data from public firms, ignoring the potential of surveys as a research tool. Addressing this gap, our study investigates the relationship between retail investors’ perceptions of corporate ESG performance and their investment attitude, as well as the impact on intention, with social self-efficacy serving as a moderator. The theoretical framework of this research was adopted from the theory of planned behavior (TPB) and previous studies that used TPB to measure intention reveal a range of explanations for the connection between the factors influencing intention through attitude. Structural Equation Modeling (SEM) analysis was used in this study, and the new findings show that Chinese investors’ perceptions of corporate ESG performance positively influence their investment attitudes and intentions. Furthermore, social self-efficacy moderates the relationship between the corporate environment and governance performance, attitudes, and intentions. Accordingly, this study identifies the contribution of explaining how investment intentions are related to corporate ESG performance, which has been based on past ESG studies, to lay a platform for sustainable corporate practices in the Chinese stock market. Full article

This paper discusses the application of digital information management tools in the context of financial control. In Bulgaria, such research is innovative as it is the first time that digital transformation in crucial financial control institutions, which influence the formation of the revenue part of the state budget and the spending of public funds, has been studied. The study aims to answer the research question of to what extent the application of digital tools in financial control improves its effectiveness. It analyses how modern technologies improve the efficiency and accuracy of information used in financial control institutions. The authors examine the impact of digital tools, such as database management systems, business analytics platforms, and electronic document management tools, on collecting, analyzing, and managing financial and non-financial information. The study uses descriptive statistics and a correlation analysis, which significantly contributes to establishing the relationship between implemented digital tools and improvements in financial control procedures. The results show that despite the conditions created for digitalization in financial control institutions, digital tools are used to a limited extent in the information management process. The study emphasizes the need for continuous investment in digital technologies and training to maximize the benefits of their application in financial control. Full article

Nowadays, the dynamism caused by constant changes to strategic decisions in markets poses an additional difficulty in an organization’s management. The strategic decisions made by managers can easily become obsolete. One of the major difficulties in managing a commercial organization is predicting, with some precision, the impact some strategic decisions have on the financial results. Business intelligence (BI) is widely used to help managers make strategic decisions. However, the methods used to achieve the conclusions are kept secret by BI company-based services. Modeling the environment may help predict the impact of an action in a real environment. A good model should provide the most accurate result of an applied action in a given environment. Artificial neural networks (ANNs) are proven to be excellent in modeling environments with very high data noise. The same strategic action can have different results when applied to different organizations. A tool that allows the evaluation of an applied strategic action in an environment will be of great importance in the field of management. Modeling the environment will save time and money for the organization, allowing the performance of the strategic plan to be improved. If one evaluates the state of the environment after a certain strategic action is applied, it can be possible to mitigate its risk of failure. As we will verify, it is possible to use ANNs to model strategic environments, allowing precision in the prediction of sales and operating results using particular strategies. Full article

This study addresses the implementation of the International Financial Reporting Standard 9 (IFRS 9) in the European Union as of 1 January 2018, replacing the International Accounting Standard 39 (IAS 39) to introduce a new model for recognizing Loan Loss Provisions (LLP), based on Expected Credit Loss (ECL). This model responds to criticisms of the former Incurred Credit Loss (ICL) system for its inability to reflect credit losses in a timely manner, potentially exacerbating the effects of financial crises. This study focuses on the effects of adopting the ECL model on the level of Loan Loss Allowances (LLA) in loans, own equity, and the Common Equity Tier 1 (CET1) ratio across 13 Portuguese commercial banks. A mean comparison test is used to evaluate scenarios before and after the application of the ECL model, highlighting the importance of regulator actions and the adequacy of loss recognition policies, including the effects of European Union (2017). The results obtained demonstrate significant negative impacts on the net values of loans, own equity, and the CET1 ratio upon adopting the IFRS 9 ECL model due to the widespread increase in LLAs. Full article

Financial signaling and stock return synchronicity may not be at crossroads. This paper optimizes the signaling effect of firms’ financial indicators on stock return synchronicity. The ultimate objective is to align firms’ financial signaling and stock return synchronicity, which implies a benefit of hedging against fluctuations in the stock market index. The data cover quarterly periods from June 1992 to March 2022 for the non-financial firms listed in the DJIA30 and NASDAQ100. This paper examines the observed return synchronicity as the dependent variable. The independent variables are classified into six groups namely, Solvency (or Liquidity) ratios, Assets Efficiency ratios, Expense Control ratios, Debt (or Leverage) ratios, Profitability ratios, and Dividend ratios. The analysis is conducted on two different groups. The first group examines the observed firms’ financials that affect observed stock return synchronicity. The second group examines optimal firms’ financials that help optimize stock return synchronicity. The final results show that (a) current stock return synchronicity is affected positively by cash ratio, and negatively by receivables and historical growth of earnings; (b) optimal stock return synchronicity can be elevated using significant financial indicators namely, Inventory/Current Assets, Net Working Capital/Total Assets, Net worth/Fixed Assets, and Sales Annual Growth; (c) agency conflicts between managers and shareholders can be mitigated by the aforementioned financial indicators, which do not include debt financing being the common source of agency conflicts; and (d) dividends are still insignificant to stock return synchronization. Full article

How does stock overvaluation in secondary financial markets affect long-term firm performance when significant corporate “insiders” seek to realize self-benefit? Using a sample of Chinese listed companies from 2007 to 2018, we find that overvaluation of stock price has a negative impact on long-term firm performance. Moreover, our results show that management myopia mediates the relationship between stock overevaluation and long-term performance. Our study enriches the discussion of stock overvaluation and extends the management myopia literature by considering unique aspects of the irrational behavior of firm decision makers, providing implications for governments to improve their capital market reform and development. Full article

We investigate the potential of global real estate to improve the long-term performance of a US equity portfolio, utilizing a recent dataset of 40 years’ worth of US stocks, US real estate, 13 foreign stock markets, and 13 foreign real estate markets across diverse regions. Despite a modest performance in terms of risk and return, foreign real estate has consistently lower correlations with US stocks compared to foreign equities. Rolling correlation analysis indicates that foreign real estate markets remain relatively segmented compared to foreign equity, despite increasing financial market correlations over time. Efficient frontier analysis demonstrates that portfolios including foreign real estate consistently outperform those limited to US stocks and US real estate or those including foreign stocks, indicating the importance of foreign real estate in optimizing portfolio performance. Subperiod analysis reveals that foreign real estate retains its diversification benefits even in the latter, more integrated period. Our results are robust when using Conditional Value-at-Risk as a measure of risk. Overall, our findings highlight the persistent diversification benefits and superior risk-adjusted returns from incorporating foreign real estate into US equity portfolios. Full article

This study investigates the dynamics within entrepreneurial ecosystems, focusing on the influence of venture capital (VC) financing clusters and industry clusters on startup success. VC financing clusters, geographic hubs with intense VC funding activities, and industry clusters, regions with concentrated sector-specific firms, are integral components. Expanding existing research that links proximity to these clusters with successful exits through mergers and acquisitions (M&A), our study includes initial public offerings (IPOs) as a vital exit strategy. Results show that affiliations with venture capitalists in prominent VC financing clusters enhance M&A and IPO success for startups. Intriguingly, startups in industry strongholds exhibit a greater likelihood of M&A success, but, this effect is not seen for IPO exits. Additionally, the absence of startup co-location with venture capitalists in VC financing hubs does not impact IPO exits but hinders M&A success. These nuanced insights highlight the complex relationships within entrepreneurial ecosystems and underscore the need for tailored perspectives considering diverse exit pathways. Full article

We construct a model where, at each time instance, risky securities can only take a limited number of values and the equity-linked policy sold by the insurer to policyholders pays benefits linked to these securities. Since the number of states in the model exceeds the number of securities in the (incomplete) market, the martingale measure is not unique, posing a problem in pricing insurance instruments. In this framework, we consider how a super-replicating strategy violates the assumption of absence of arbitrage, yet simultaneously allows the insurance company to fully hedge against financial risk. Since the super-replicating strategy, when considered alone, would be too costly for any rational insured person, through the definition of the safety loading, we demonstrate how the insurer can still hedge against financial risk, albeit at the expense of increasing its exposure to demographic risk. This approach does not aim to show how the pricing of the index-linked policy can actually be performed but rather highlights how risk theory-based approaches (via the definition of the profit and loss random variable) enable the management of the trade-off between financial risk and demographic risk. Full article

Recent years have seen increasing initiatives involving more applications of real options to value the strategizing process. These initiatives, referred to as Real Option Theory (ROT), imply greater inclusiveness of simple and advanced real options in strategizing processes. While substantial theoretical groundwork on ROT has been laid in corporate finance, and both qualitative and quantitative studies on ROT in business management journals are appearing on an increasing basis, there remain significant opportunities for more research on strategic synergism in patent-based acquisitions. In this vein, the current paper aims to explore a rainbow real options application (real options that are exposed to two sources of uncertainty) to measure patent-based collaborative synergies in high-tech mergers and acquisitions. Having conducted the deviant case study of ZOOX start-up’s acquisition by Amazon.com in 2020, this paper justifies the proposition of the employability of rainbow real options for the valuation of network and relational synergies in highly risky patent-based acquisitions with multiple uncertainties. Full article

This study examines the relationships between Greek macroeconomic variables, examining before and after the euro’s introduction as a currency. We conducted an extensive analysis from 1980 to 2019, examining various economic indicators such as government expenditure, unemployment rates, taxation, inflation, and national debt, employing causal and correlation analysis and econometric modeling with and without time-varying effects. The results revealed a significant correlation between the introduction of the euro and a tighter relationship between government spending and unemployment levels, while one more remarkable point was that higher government spending or debt reduction initiatives appeared to positively impact joblessness, particularly in the context of the euro. Our research underscored the correlation between national debt and government spending as increased debt led to reduced government expenditure and vice versa. Unemployment cited an increased impact on government spending right after the euro adoption, and on the other hand, the effect of unemployment on government spending decreased. The debt–government spending nexus was decreasing for many years before the euro adoption, while just before the euro adoption, the relationship between debt and government spending was rather stable. Finally, during the euro adoption, the effect of inflation on tax increased, while the corresponding inflation tax remained stable. Our findings have significant implications for policymakers shaping the economic strategies in Greece as they point out the necessity for stable and balanced approaches that manage government spending and debt to address unemployment effectively. Full article

The increase in global economic policy uncertainty (EPU), volatility or stock market uncertainty (VIX), and geopolitical risk (GPR) has affected gold prices (GD), crude oil prices (WTI), and stock markets, which present challenges for investors. Sustainable stock investments in emerging markets may minimize and diversify investor risk. We applied the non-linear autoregressive distributed lag (NARDL) model to examine the effects of EPU, VIX, GPR, GD, and WTI on sustainable stocks in seven emerging markets (Thailand, Malaysia, Indonesia, Brazil, South Africa, Taiwan, and South Korea) from January 2012 to June 2023. EPU, VIX, GPR, GD, and WTI showed non-linear cointegration with sustainable stocks in seven emerging markets and possessed different asymmetric effects in the short and long run. Change in EPU increases the return of Thailand’s sustainable stock in the long run. The long-run GPR only affects the return of Indonesian sustainable stock. All sustainable stocks are negatively affected by the VIX and positively affected by GD in the short and long run. Additionally, long-run WTI negatively affects the return of Indonesia’s sustainable stocks. Our findings contribute to rational investment decisions on sustainable stocks, including gold and crude oil prices, to hedge the asymmetric effect of uncertainty. Full article

The objective of this paper is to assess the behavior of policyholders and insurance companies in the presence of adverse selection by accounting for costly search and selection efforts, respectively. Insurers seek to stave off high-risk types, while consumers are hypothesized to maximize coverage at a given premium. Reaction functions are derived for the two players giving rise to Nash equilibria in efforts space, which are separating almost certainly regardless of the share of low risks in the market. Empirical evidence from the Australian market for automobile insurance is analyzed using Structural Equation Modeling. Convergence has been achieved with both the developmental and test samples. Both consumer search and insurer selection are found to be positively correlated with risk type, providing a good measure of empirical support for the theoretical model. Full article

In this study, we aim to investigate the effects of remittance on sustainable economic development in 52 developing and emerging economies from 1996 to 2021. The study uses other variables such as real GDP per capita, total natural resource rents, globalization, and foreign direct investment. To achieve the mentioned objective, we apply a series of second-generation panel estimation approaches. These include CIPS unit root, Westerlund cointegration, cross-sectional augmented autoregressive distributed lag (CS-ARDL), and robustness using augmented mean group (AMG) and common correlated mean group (CCEMG). These methods are useful provided they are robust towards cross-country dependencies, slope heterogeneity, endogeneity, and serial correlation, which are disregarded in the conventional panel estimations. The empirical findings indicate that remittance accelerates sustainable economic development. Additionally, real GDP per capita and globalization also positively contribute towards sustainable economic development. However, total resource rents deteriorate sustainable economic development. This study offers key policy implications based on the empirical findings for the developing and emerging economies. Full article

Based on the theoretical frameworks on dynamic capabilities and business model innovation, we conducted a comprehensive survey and analysis involving 451 Chinese university student enterprises. The primary objective was to investigate the synergistic mechanism between these two factors, assessing their impact on business model innovation and tracing the evolutionary path. The study revealed the following key findings: (1) positive correlations exist between digital capabilities and business model innovation; (2) entrepreneurial passion serves as a mediator in the positive relationship between digital capabilities and the discovery of digital opportunities; (3) digital opportunity discovery acts as a mediator in the relationship between digital capabilities and business model innovation; (4) under the mediation of dynamic capabilities, digital opportunity discovery significantly promotes business model innovation. Our research contributes to the empirical exploration of digitization in enterprises, shedding light on the collaborative influence of digital capabilities and digital opportunity discovery on business model innovation. Importantly, it elucidates the contextual boundaries that influence business model innovation through diverse pathways, enhancing our comprehensive understanding of the dynamic landscape in the evolution of digital business transformations. Full article

Audit committees are appointed by the board of directors of corporations to oversee the financial reporting process, monitor financial control processes, hire and assess independent auditors, and communicate findings with management and auditors. We propose two new measures of audit oversight quality. The first measure is purely subjective, in that it scores audit committees on a scale based on their ability to fulfill one or more of their responsibilities, as mentioned in annual reports, Form 10-K and DEF 13A. The second measure concerns audit committee activity, as it measures the number of times the term ‘audit committee’ is mentioned in these documents. Both measures were obtained for U.S. pharmaceutical companies and energy companies from 2010 to 2022. The audit oversight quality measures were regressed in regard to profitability (measured by return on assets and return on equity), debt capacity (measured by equity multiplier), and firm value (measured by Tobin’s q and economic value added). Audit oversight quality, using both measures, reduces the return on equity. Audit oversight quality, using both measures, had a disciplining effect on debt. Increases in the oversight of increasing debt discourage the propensity to increase borrowing using collateral (debt capacity), and reduce investor returns through investment in debt-financed projects (return on equity). Audit oversight quality, using both measures, exhibited a size effect on the firm’s value, in that an increase in the firm size with high audit oversight quality increases the firm’s value. However, it is possible that only the first measure of audit oversight quality significantly increased the firm’s value, as only the first measure exhibited robustness to the endogeneity effect of size. Full article

The attainment of adequate finance remains a substantial hindrance for small- and medium-sized enterprises (SMEs) across many countries. This study aim to investigate the association between SMEs’ external finance utilization and perceived risk (PR). Additionally, it intends to explore the moderating role of business age (BAge) in the relationship between SMEs’ external finance utilization and PR. The study employed a structured online questionnaire to gather data from 711 SME owners/managers in Saudi Arabia. SmartPLS 4 software was utilized to analyze the research data. The results of the partial least squares structural equation modeling confirmed that the decision of SMEs to use external financing is significantly and negatively impacted by the PRs associated with external finance. Furthermore, BAge moderates the relationship between PR and SMEs’ external finance usage (EFU). However, the study found that BAge does not significantly affect both the PRs and the SMEs’ EFU. This study highlights the intricate dynamics of PR, BAge, and an SME’s decision to employ external finance. The practical and theoretical implications of the study findings are thoroughly discussed. Full article

This paper examines the stochastic behaviour of the realized betas in the CAPM model for the ten largest companies in terms of market capitalisation included in the U.S. Dow Jones stock market index. Fractional integration methods are applied to estimate their degree of persistence at daily, weekly, and monthly frequencies over the period July 2000–July 2020 over time spans of 1, 3, and 5 years. On the whole, the results indicate that the realized betas are highly persistent and do not exhibit weak mean-reverting behaviour at the weekly and daily frequencies, whilst there is some evidence of weak mean reversion at the monthly frequency. Our findings confirm the sensitivity of beta calculations to the choice of frequency and time span (the number of observations). Full article