Ons Triki and Fathi Abid
This study aims to conceive and develop a pricing model for the Ijara contingent convertible contract (ICCC, hereafter), considering the possibility that the lessee may…
Abstract
Purpose
This study aims to conceive and develop a pricing model for the Ijara contingent convertible contract (ICCC, hereafter), considering the possibility that the lessee may default. The ICCC model grants the lessor the option of converting the unpaid amount into equity or recovering the leased equipment and selling it at market price in case of financial distress.
Design/methodology/approach
The ICCC is consistent with the profit-sharing approach and the new risk management techniques, which are compatible with Islamic philosophy. Relying on real options theory and the contingent claim approach, a closed-form solution of the firm’s assets is developed in a dynamic environment, where the rate of return is generated by a Cox-Ingersoll-Ross stochastic process.
Findings
Examining the numerical analysis reveals the impact of the firm value, the conversion or sell decision and the conversion ratio and volatility on the ICCC value. The value of the ICCC can increase substantially as the value of the firm approaches the conversion threshold. The conversion ratio as well as the asset market price play equally an important role in the decision to convert or sell.
Originality/value
This paper develops a pricing model for a contingent Ijara contract, which incorporates a conversion option to mitigate the lessee’s credit risk during periods of economic instability. The ICCC is a cooperative strategy that would be advantageous to all parties, including the lessor and lessee. In the event of a conversion, businesses may be able to continue operating thanks to this financial innovation, and the lessor may profit from the company’s recovery by freeing up more resources for the use of more profitable ventures.
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Ons Triki and Fathi Abid
The objective of this paper is twofold: first, to model the value of the firm in the presence of contingent capital and multiple growth options over its life cycle in a stochastic…
Abstract
Purpose
The objective of this paper is twofold: first, to model the value of the firm in the presence of contingent capital and multiple growth options over its life cycle in a stochastic universe to ensure financial stability and recover losses in case of default and second, to clarify how contingent convertible (CoCo) bonds as financial instruments impact the leverage-ratio policies, inefficiencies generated by debt overhang and asset substitution for a firm that has multiple growth options. Additionally, what is its impact on investment timing, capital structure and asset volatility?
Design/methodology/approach
The current paper elaborates the modeling of a dynamic problem with respect to the interaction between funding and investment policies during multiple sequential investment cycles simultaneously with dynamic funding. The authors model the value of the firm in the presence of contingent capital that provides flexibility in dealing with default risks as well as growth options in a stochastic universe. The authors examine the firm's closed-form solutions at each stage of its decision-making process before and after the exercise of the growth options (with and without conversion of CoCo) through applying the backward indication method and the risk-neutral pricing theory.
Findings
The numerical results show that inefficiencies related to debt overhang and asset substitution can go down with a higher conversion ratio and a larger number of growth options. Additionally, the authors’ analysis reveals that the firm systematically opts for conservative leverage to minimize the effect of debt overhang on decisions so as to exercise growth options in the future. However, the capital structure of the firm has a substantial effect on the leverage ratio and the asset substitution. In fact, the effect of the leverage ratio and the risk-shifting incentive will be greater when the capital structure changes during the firm's decision-making process. Contrarily to traditional corporate finance theory, the study displays that the value of the firm before the investment expansion decreases and then increases with asset volatility, instead of decreasing overall with asset volatility.
Research limitations/implications
The study’s findings reveal that funding, default and conversion decisions have crucial implications on growth option exercise decisions and leverage ratio policy. The model also shows that the firm consistently chooses conservative leverage to reduce the effect of debt overhang on decisions to exercise growth options in the future. The risk-shifting incentive and the debt overhang inefficiency basically decrease with a higher conversion ratio and multiple growth options. However, the effect of the leverage ratio and the risk-shifting incentive will be greater when the capital structure changes during the firm's decision-making process.
Originality/value
The firm's composition between assets in place and growth options evolves endogenously with its investment opportunity and growth option financing, as well as its default decision. In contrast to the standard capital structure models of Leland (1994), the model reveals that both exogenous conversion decisions and endogenous default decisions have significant implications for firms' growth option exercise decisions and debt policies. The model induces some predictions about the dynamics of the firm's choice of leverage as well as the link between the dynamics of leverage and the firm's life cycle.
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Simplice Asongu and Jacinta Nwachukwu
The purpose of this study is to examine the role of reducing information asymmetry (IA) on conditional financial sector development in 53 African countries for the period…
Abstract
Purpose
The purpose of this study is to examine the role of reducing information asymmetry (IA) on conditional financial sector development in 53 African countries for the period 2004-2011.
Design/methodology/approach
The empirical evidence is based on contemporary and non-contemporary quantile regressions. Instruments for reducing IA include public credit registries (PCRs) and private credit bureaus (PCBs). Hitherto unexplored dimensions of financial sector development are used, namely, financial sector dynamics of formalization, informalization, semi-formalization and non-formalization.
Findings
The following findings are established. First, the positive (negative) effect of information sharing offices (ISO) on formal (informal) financial development is consistent with theory. Second, ISOs consistently increase formal financial development, with the incidence of PCRs higher in terms of magnitude, and financial sector formalization, with the impact of PCBs higher for the most part. Third, only PCBs significantly decrease informal financial development and both ISOs decrease financial sector informalization. Policy implications are discussed.
Originality/value
The study assesses the effect of reducing IA on financial development when existing levels of it matter because current studies based on mean values of financial development provide blanket policy implications which are unlikely to be effective unless they are contingent on prevailing levels of financial development and tailored differently across countries with high, intermediate and low initial levels of financial development.
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Hamza Aib, Jacques Liouville and Hemant Merchant
The purpose of this study is to demonstrate the effect of initial international joint ventures (IJV) structural conditions on two main equity-based instability facets: change of…
Abstract
Purpose
The purpose of this study is to demonstrate the effect of initial international joint ventures (IJV) structural conditions on two main equity-based instability facets: change of IJV ownership structure and acquisition of the IJV by one of the IJV partners. Drawing on the transaction cost theory, the authors examine three key initial structural conditions: IJV formation mode, number of partners and IJV’s ownership structure.
Design/methodology/approach
The authors apply the “Event history analysis” technique to test the hypotheses using a data set of 140 French-foreign JVs.
Findings
The findings show that the mode of an acquisitive IJV and unequal equity positions held by partners increase the likelihood of a change of IJV’s ownership structure and its eventual acquisition by one of the partners. In addition, the findings show that while an increase in the number of IJV partners is directly related to the change of IJV ownership structure, it has a statistically insignificant effect on IJV acquisition.
Originality/value
Drawing on “transaction costs” arguments, this study advances the literature by offering fine-grained results related to the effects of initial structural conditions on aspects of unintended instability in French-foreign JVs.
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Simplice Asongu and Jacinta Nwachukwu
The purpose of this paper is to investigate how bank size affects the role of information asymmetry on financial access in a panel of 162 banks in 39 African countries for the…
Abstract
Purpose
The purpose of this paper is to investigate how bank size affects the role of information asymmetry on financial access in a panel of 162 banks in 39 African countries for the period 2001-2011.
Design/methodology/approach
The empirical evidence is based on instrumental variable fixed effects regressions with overlapping and non-overlapping bank size thresholds to control for the quiet life hypothesis (QLH). The QLH postulates that managers of large banks will use their privileges for private gains at the expense of making financial services more accessible to the general public. Financial access is measured with loan price and loan quantity whereas information asymmetry is implicit in the activities of public credit registries and private credit bureaus.
Findings
The findings with non-overlapping thresholds are broadly consistent with those that are conditional on overlapping thresholds. First, public credit registries have a decreasing effect on the price of loans with the magnitude of reduction comparable across all bank size thresholds. Second, both public credit registries and private credit bureaus enhance the quantity of loans. Third, compared with public credit registries, private credit bureaus have a greater influence in increasing financial access because they have a significantly higher favorable effect on the quantity and price of loans Fourth, the QLH is not apparent because large banks are not associated with lower levels of financial access compared to small banks.
Originality/value
Studies of public credit registries and private credit bureaus in Africa are sparse. This is one of the few to assess linkages between bank size, information asymmetry and financial access.
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Md. Farijul Islam, M.M. Mofiz Uddin and Md. Mominur Rahman
This study aims to examine the determinants of retailer social responsibility (RSR) in Old Dhaka City and their impact on RSR practices.
Abstract
Purpose
This study aims to examine the determinants of retailer social responsibility (RSR) in Old Dhaka City and their impact on RSR practices.
Design/methodology/approach
A cross-sectional design was used to collect primary data from 180 retailers through a questionnaire survey. The study used partial least squares structural equation modeling to analyze the data and examine the relationships among the determinants of RSR.
Findings
The study found that economic and ethical factors positively and significantly affect RSR practices, while social and environmental factors negatively but not significantly affect RSR practices. Cultural factors were also found to positively and significantly affect RSR practices.
Practical implications
This study provides insights for retailers and policymakers to enhance their RSR practices by considering economic, ethical and cultural factors. The findings also contribute to the existing literature on stakeholder theory by highlighting the importance of considering multiple stakeholders in RSR practices.
Originality/value
This study provides insights into the determinants of RSR in a unique setting in associating stakeholder theory and in Bangladesh, which has received limited attention in the literature on RSR.
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Rubeena Tashfeen and Tashfeen Mahmood Azhar
No systematic models are being used in empirical research that provide assurance for the choice of proxies that are being used. The purpose of this paper is to examine the…
Abstract
Purpose
No systematic models are being used in empirical research that provide assurance for the choice of proxies that are being used. The purpose of this paper is to examine the validity of the proxies being used in empirical research, and as a case study, it focuses on the area of financial derivatives.
Design/methodology/approach
First, the authors review results of proxies from the financial derivatives literature and follow with empirical tests to confirm the findings from the review.
Findings
The review shows that proxies provide mixed results. The findings are further supported by the results from empirical tests. It suggests that measures used in the studies related to financial derivatives theory may need to be refined and highlights that no solid bases or tests have been developed for the proxies used to measure the constructs.
Research limitations/implications
As individual proxies are examined across studies, a meta-regression analysis cannot be used, and there is no other available model to capture this type of examination. The approach adopted has some limitations but provides a basis for examining the reasonableness of proxies as measures of constructs.
Originality/value
This is the first study that attempts to examine the strength of proxies in capturing related constructs. The methodology is unique to a review of past studies in financial derivatives. It supports the need for developing more rigorous models/bases for the measures being used, and this is an area that has been ignored in empirical research.
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John R. Anchor and Hana Benesova
This chapter seeks to conceptualize a new approach to the identification of the factors influencing the adoption of a political risk assessment (PRA) function. By making use of…
Abstract
This chapter seeks to conceptualize a new approach to the identification of the factors influencing the adoption of a political risk assessment (PRA) function. By making use of firm value maximization and risk aversion and considering the rationale for risk management activities, a number of determinants are identified which can be deployed in future PRA studies. A model for predicting the PRA adoption decision is proposed. Geographical contextualization in one or more emerging markets (EMs) provides a further dimension of originality as well as reflecting an increasingly important international business phenomenon. Political risk (PR) and political risk assessment (PRA) are of increasing importance in the context of the growth and development of emerging markets (EMs). The latter provide opportunities for inward investment from more developed economies. There has also been a rapid growth in outward foreign direct investment (OFDI) from emerging markets to other economies. This chapter adds to the current understanding of PRA by examining this issue in emerging markets (EMs) through the model developed here.
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Affaf Asghar Butt, Sayyid Salman Rizavi, Mian Sajid Nazir and Aamer Shahzad
This study aims to examine the effect of corporate derivatives use on firm value and how the corporate governance index modifies this relationship.
Abstract
Purpose
This study aims to examine the effect of corporate derivatives use on firm value and how the corporate governance index modifies this relationship.
Design/methodology/approach
The sample consists of 219 nonfinancial firms on the Pakistan Stock Exchange (PSX) from 2011 to 2019. The study used ordinary least square regression with year and industry dummies for estimations. Multiple estimation models such as fixed/random effect, Fama–MacBeth and two-stage least squares (2SLS) are used for robustness. Finally, the PROCESS macro tool is used to estimate the effect of moderating the role of corporate governance (CG) as robustness.
Findings
The findings show that derivatives use has an inverse influence on firm value. The firms did not use derivatives as a risk management tool but for speculation motives. However, the corporate governance index significantly weakens this relationship. However, strong governance forces the managers to use derivatives for hedging purposes. The firm-specific factors, including size, age, leverage, cash, financial distress cost, dividend and growth opportunities, also significantly influence firm value. The findings are robust to the other estimation models.
Research limitations/implications
The findings indicate that emerging economies like Pakistan are more prone to agency problems. The strong corporate governance structure helps firms turn the speculative motive of derivatives use into hedging purposes and mitigate the agency issues.
Practical implications
This empirical evidence suggests that good governance structures can help improve the impact of derivative usage on firm value.
Originality/value
To the best of the author's knowledge, this is the first study that examines the conditional role of corporate governance on the derivatives–value relationship from the viewpoint of agency problem/speculative motive.
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Konstantinos Rotsios, Nikolaos Sklavounos and Yannis Hajidimitriou
The purpose of this study is to examine the effect of the Greek partners' prior international joint venture (IJV) experience on partner compatibility, knowledge transfer (KT) and…
Abstract
Purpose
The purpose of this study is to examine the effect of the Greek partners' prior international joint venture (IJV) experience on partner compatibility, knowledge transfer (KT) and trust in their IJVs.
Design/methodology/approach
The authors conducted a primary research study and collected a total of 50 useable questionnaires from Greek firms with IJV participation.
Findings
The findings show a positive effect of the Greek partner's prior experience in IJV establishment and management on partner compatibility and on successful KT to the IJV.
Practical implications
The results are significant for executives of firms who seek to expand to international markets through IJV formation and for practitioners involved in IJVs, regarding prior IJV experience, partner compatibility and KT to their IJVs.
Originality/value
This study uses a sample of Greek firms with IJV participation to examine the effect of their prior IJV experience on IJV partner relations in the region of South East (SE) Europe. Additionally, it enhances the understanding of the effect of prior experience in the IJV establishment and management in emerging markets and sheds light to the antecedents of partner compatibility, which have been neglected by researchers.