Abstract In this study, we determine why CEOs from lobbying firms receive higher pay compared to their non-lobbying peers. We investigate whether insider trading can explain high CEO pay. Using hand-collected firm-level lobbying data, we examine whether CEOs from lobbying firms engage in insider trading after sponsored bills are introduced and passed in the U.S. Congress. Our results show that the number of CEO stock transactions from lobbying firms correlates with bills being passed, which yields higher compensation packages. In addition, we find that lobbying benefits firm performance. Lobbying firms receive more government contracts, which increases firm value. Overall, lobbying benefits both CEOs and shareholders. Highlights • This study investigates whether insider trading can explain high CEO pay. • Results show correlation between lobbying firm CEO stock transactions and bills being passed. • Lobbying firms receive more government contracts, which increases firm value. • Overall, lobbying benefits both CEOs and shareholders.
Graphical abstract Abstract This paper examines the relationship between financial inclusion and economic growth in Organization of Islamic Cooperation (OIC) countries. In order to draw multilateral results, we have set up the panel data for 55 OIC countries and estimated not only the dynamic panel estimation, but also the panel VAR, IRFs, and panel Granger causality tests. Based on the results of dynamic panel estimations, we find that financial inclusion has a positive effect on economic growth. The IFRs results derived from the panel VAR analysis suggest that financial inclusion has positive effects on the economic growth and financial inclusion and economic growth have mutual causalities with each other based on the panel Granger causality tests. Therefore, it seems reasonable to conclude that financial inclusion has positive effect on the economic growth in OIC countries.
M. Kabir Hassan
Abu Nahian Faisal Khan
Highlights • A CAPM-EGARCH-ICSS model is used to capture the volatility and return dynamics of ethical indexes after the 2008 crisis. • Islamic indexes were less affected by systematic risk than their SRI counterparts after the financial crisis. • SRI indexes were more resistant in very integrated markets. • Islamic indexes were more resilient in less integrated markets. • Regime-switching periods offer incentives for style investing. Abstract This paper compares the resilience of ethical (Islamic and socially responsible) indexes among five developed (US, UK, Japan, Canada, Australia) and three emerging markets (Brazil, India, South Africa) during the period following the 2008 subprime crisis. It relies on a multivariate CAPM-EGARCH model that accounts for sudden changes in volatility through the application of an iterated cumulative sums of squares (ICSS) algorithm on daily data over the sample period 2008–2014 to model time-varying volatility and ensure reliable estimates. The study confirms the lower systemic risk associated with Islamic indexes during the bearish period and reports that SRI, despite being more subject to systemic risk, offered higher alphas in highly integrated markets, while Islamic indexes performed better in less integrated ones. The evidence also reveals a very limited increase in the models’ predictability power from the integration of sudden changes in volatility into the EGARCH models during the full sample period. This limit is more marked during the bearish sub-period. Our findings have important implications for international investment and portfolio diversification perspectives in times of financial downturn.
Abstract We report new evidence on the bank and institutional determinants of Islamic bank capital ratios in 28 countries between 1999 and 2013. Overall, we find that smaller, more profitable, and highly liquid Islamic banks are more highly capitalized. Additionally, improvements in the economic and financial environments and market discipline within a country correspond with higher Islamic bank capitalization. The results shed light on the impact that Sharia'a law restrictions have on Islamic banking capitalization. Our findings are most robust to banks that choose to hold capital well in excess of that required by regulators, consistent with traditional capital structure theory. Our results highlight the role that stable economic and political systems play in improving bank capitalization and reducing financial sector risk. By reducing political instability and corruption, improving legal systems, and encouraging access to capital markets, policymakers may incentivize managers to make financing decisions that increase the capitalization of the Islamic banking industry in developing countries. Highlights • Better economic conditions tend to have positive effect on Islamic banks’ capitalization strategies. • This effect is stronger in more democratic and more stable countries with hybrid legal systems. • The disciplinary role of financial markets is an important driver of this positive effect. • Institutional environment is an important tool to create more favorable conditions to successfully implement Basel III Accords.
Highlights • Significant negative abnormal returns exist during product recall dates. • Product recalls vary for industries in terms of operation and competition. • Recalls causes spillover effects at industry level with rival firms receiving positive returns. Abstract We examine 1460 product recalls that were announced by U.S Official Agencies between January 1990 and December 2014. Consistent with previous research, we report statistically significant negative abnormal returns during the announcement dates. Moreover, our results suggest two main objectives. First, we find that the effect of product recalls vary for industries in terms of operation and competition. Second, we show that recall announcements cause spillover effect at industry where rival firms receive short term positive abnormal returns during announcement dates. Over post-announcement periods, cumulative abnormal returns (CARs) lose significance and results are robust for both selected market index and estimation method.
Highlights • The bank lending decisions in credit crunch environments are big challenge. • This NP-hard optimization problem is solved using a proposed GA based model. • The proposed model is tested using two scenarios with simulated and real data. • The real data is collected from Southern Louisiana Credit Union. • The proposed model increased the bank profit and improved the system performance. Abstract To avoid the complexity and time consumption of traditional statistical and mathematical programming, intelligent techniques have gained great attention in different financial research areas, especially in banking decisions’ optimization. However, choosing optimum bank lending decisions that maximize the bank profit in a credit crunch environment is still a big challenge. For that, this paper proposes an intelligent model based on the Genetic Algorithm (GA) to organize bank lending decisions in a highly competitive environment with a credit crunch constraint (GAMCC). GAMCC provides a framework to optimize bank objectives when constructing the loan portfolio, by maximizing the bank profit and minimizing the probability of bank default in a search for a dynamic lending decision. Compared to the state-of-the art methods, GAMCC is considered a better intelligent tool that enables banks to reduce the loan screening time by a range of 12%–50%. Moreover, it greatly increases the bank profit by a range of 3.9%–8.1%.
Abstract In this paper, we investigate the influence of CEO political orientation on corporate lobbying efforts. Specifically, we study whether CEO political ideology, in terms of manager-level campaign donations, determines the choice and amount of firm lobbying involvement and the impact of lobbying on firm value. We find a generous engagement in lobbying efforts by firms with Republican leaning-managers, which lobby a larger number of bills and have higher lobbying expenditures. However, the cost of lobbying offsets the benefit for firms with Republican CEOs. We report higher agency costs of free cash flow, lower Tobin's Q, and smaller increases in buy and hold abnormal returns following lobbying activities for firms with Republican managers, compared to Democratic and Apolitical rivals. Overall, our results suggest that the effects of lobbying on firm performance vary across firms with different managerial political orientations. Highlights • CEO political orientation determines firm lobbying behavior. • The effect of lobbying on firm performance depends on CEO political ideology. • Firms with Republican leaning CEOs lobby more bills and spend more money. • Excess lobbying fails to create value for firms with Republican leaning managers. • Our results have important implications for agency cost problem.
Highlights • We find that sovereign CDS and bond markets are co-integrated. • The sovereign bond market mostly leads in price discovery by adjusting to new information regarding credit risk before CDS. • We find a positive correlation between financial integration and bond market information share. • Changes in sovereign credit risk and bond yields are influenced by common global factors. Abstract This study investigates the link between the price discovery dynamics in sovereign credit default swaps (CDS) and bond markets and the degree of financial integration of emerging markets. Using CDS and sovereign bond spreads, the price discovery mechanism was tested using a vector error correction model. Financial integration is measured using news-based methods. We find that sovereign CDS and bond markets are co-integrated. In five out of seven sovereigns (71%), the bond market leads in price discovery by adjusting to new information regarding credit risk before CDS. In 29% of times, CDS markets are the source of price discovery. We also find a positive correlation of 0.67 between the degree of financial integration and the bond market information share. The evidence suggests that changes in sovereign credit risk and bond yields are significantly influenced by common external (global) factors, while country-specific factors play an insignificant role.
Highlights • Conventional partial adjustment model is deficient for explaining capital structure model. • We present and estimate a financing-based partial adjustment model. • We separate the effects of financing decisions on leverage evolution from mechanical evolution. • Speed of adjustment in our model more than doubles than that of mechanical mean reversion. Abstract The conventional partial adjustment model, which focuses on leverage evolution, has difficulty identifying deliberate capital structure adjustments as it confounds financing decisions with the mechanical autocorrelation of leverage. We propose and estimate a financing-based partial adjustment model that separates the effects of financing decisions on leverage evolution from mechanical evolution. The speed of adjustment (SOA) is firm-specific and stochastic, and active targeting of capital structure has a multiplier effect that depends on the size of financial deficit. Overall, we find expected SOA from active rebalancing (30%) more than doubles what is expected from mechanical mean reversion alone (13%).
Abstract In this study, we analyze employee litigation and other work-related complaints to examine if the judicial process favors firms that engage in lobbying. We gather data for 27,794 employee lawsuits (after their initial court hearings) filed between 2000 and 2014 and test the relationship between employee allegations and firms' lobbying strategies. We find that employee litigation increases the number of labor-related bills in our sample. We document that an increase in employee lawsuits may drive firms into lobbying to change policy proposals. We also find robust evidence that case outcomes are different for lobbying firms compared to non-lobbying rivals, which may protect shareholder wealth in the long run. Our results suggest lobbying activities may make a significant difference in the effects of employee lawsuits. Our findings highlight the benefit of building political capital to obtain biased outcomes in favor of politically connected firms. Highlights • We investigate whether lobbying firms are favored in judicial process. • We examine if employee litigations drive firms more into lobbying. • We find that employee litigations increase the number of labor-related bills. • We document that lobbying influences case outcomes. • We find lobbying make a significant difference in employee allegations.
Abstract The objective of this paper is to ascertain whether there are significant differences in the loan loss provisioning behaviour of Islamic banks as compared to conventional banks. We proposed that loan loss provisioning will be linked to the extent of profit distribution management. The results suggest that Islamic banks consistently record lower loan loss provisions. However, the association between profit distribution management and loan loss provisioning is mixed. The overall results tend to suggest that there is an inverse relationship between profit distribution management and loan loss provisions. The results also suggest that there are differential effects depending on whether the profit distribution management is for the benefit or the detriment of investment depositors. If there is a surplus of asset returns over profit distributions (positive profit distribution management), it is observed that Islamic banks increase their loan loss provisions. However, this result does not extend to the full sample containing both Islamic and conventional banks. Further, there is no effect where the profit distribution management is for the benefit of investment depositors. Highlights • We examine whether Islamic banks utilize loan loss provisions differently from conventional banks. • Our results show that Islamic banks provide lower provisions than their conventional counterparts. • We find an inverse relationship between profit distribution management and loan loss provisions. • Results are sensitive to whether such management is for benefit or detriment of investment depositors. • There is a need for more thorough supervision and improved disclosure for investment accounts.
Abstract This paper contributes to the growing literature on the effect of religion on corporate decision making. We posit that contingent payment in mergers and acquisitions not only violates Islamic law but also results in several agency issues by creating an incentive for managers to participate in long-term value-destroying behavior during earnout periods. Our empirical results, using regression as well as difference-in-difference estimation, show that target managers significantly manage earnings upward by cutting discretionary expenses during earnout periods. As compared to a sample of matched non-earnout M&A, acquisitions with earnout clauses are followed by significantly lower long-term abnormal returns. Our arguments and results have significant economic and legal consequences on cross-border M&A and could be used to facilitate worldwide economic integration. Highlights • We examine pros and cons of earnout agreements in M&A using a noble dataset. • Managers inflate earnings by cutting discretionary expenses during earnout periods. • Earnout acquisitions are followed by negative long-term abnormal returns. • We examine earnout agreements from Islamic law perspective and propose an alternative. • We show the relevance of Islamic finance in the area of cross-border M&As.
The prevailing dollar peg of the Gulf Cooperation Council (GCC) countries and the absence of any significant current and capital account restrictions led some to believe that these countries have lost monetary independence. However, the paper presents evidence that interest rates of the GCC countries did not converge to the interest rates of the US implying that the assets of the GCC countries are not perfect substitutes to the US assets. This imperfect asset substitutability has allowed the GCC countries to manoeuvre their monetary policies and the central banks of the GCC countries have had some control over their money growth rates by sterilising the changes in international reserves. Results indicate that the monetary authorities of these countries used domestic credit policy to attain some domestic policy objective while engaging in sterilised foreign exchange intervention. This result implies that the proposed GCC central bank should be able to maintain the monetary independence as a group and can reap the benefit of monetary efficiency of the proposed Gulf Monetary Union.