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Multinational Finance Journal, 2019, vol. 23, no. 3/4, pp. 211-272
Michalis-Panayiotis Papafilis , University of Piraeus, Greece
Maria Psillaki , University of Piraeus, Greece    Corresponding Author
Dimitris Margaritis , The University of Auckland Business School, New Zealand

Abstract:
This study examines the nexus between sovereigns and banks during a crisis with a focus on the effects of PSI, the voluntary exchange program of Greek sovereign bonds with private sector involvement. The effectiveness of the program is evaluated through its impact on credit default swaps of 8 Eurozone countries and 21 banks, using daily data from 2009 to 2014. Using linear and nonlinear causality analyses, it is found that the link between sovereign and bank risk weakened after PSI, while the persistence and magnitude of lead-lag interactions also declined in the same period. A difference-in-difference model confirms this result. The findings are also robust to second moment filtering, with GARCH-BEKK residuals indicating the presence of significant albeit declining nonlinear causal effects. The empirical evidence suggests that sovereign debt restructuring initiatives, such as PSI, could be an effective policy measure to ease off pressure on the nexus between banks and their sovereigns.

Keywords : CDS spreads; PSI; sovereign/bank credit risk; contagion; nonlinear causality
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Multinational Finance Journal, 2019, vol. 23, no. 3/4, pp. 141-167
Shu Ling Chiang , National Kaohsiung Normal University, Taiwan
Ming Shann Tsai , National University of Kaohsiung, Taiwan    Corresponding Author

Abstract:
This study presents a formula for valuating a deposit insurance (DI) premium based on a specific official default probability. This formula can be used to flexibly determine the DI premium that reflects changes in economic circumstances. We provide a new estimation method to determine the implied asset risk based on the efficient frontier between asset value and asset risk. Doing so avoids the problem for estimating a bank’s assets and asset risk using market equity data. Empirical evidence shows current DI premium assumes that banks have too high default rates. We suggest the DI premium should be lower for banks that fully obey the financial supervisory regulations. Doing so should incentivize these banks to decrease their likelihood of default by strictly implementing financial regulations, thus stabilizing financial environment. We also suggest a new dynamic method to help them determine reasonable DI premiums and maintain the target level of DIF reserves.

Keywords : deposit insurance; premium; default probability; financial supervision
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Multinational Finance Journal, 2019, vol. 23, no. 1/2, pp. 103-139
Sanjay Sehgal , University of Delhi, India
Sakshi Saini , Institute of Economic Growth, India    Corresponding Author
Florent Deisting , Groupe ESC Pau, France

Abstract:
This paper investigates dynamic interdependencies among major global financial markets from January 1999 to April 2017 by examining their risk and return spillovers. Risk and return interactions are also analyzed within the sample markets. Using block-aggregation technique under the Diebold-Yilmaz framework, strong information linkages are observed among the global equity markets that intensify during the crisis period. Results establish the dominance of the US in the global financial system based on information linkages. Further, systematic factors are found to be more prevalent in spillovers among return and volatility as compared to idiosyncratic factors. With regards to interaction between risk and return, results reveal return spillovers of high magnitude onto risk and almost negligible risk spillovers onto return. These findings have important implications for international investors and policymakers.

Keywords : financial markets; Diebold and Yilmaz; spillovers; conditional volatility
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Multinational Finance Journal, 2019, vol. 23, no. 3/4, pp. 169-210
Vasiliki Athanasakou , Saint Mary’s University, Canada
George Athanassakos , University of Western Ontario, Canada    Corresponding Author

Abstract:
The purpose of this paper is to examine whether earnings quality contributes to the book-to- market’s predictive power in the cross section of stock returns. Earnings quality is embedded in the value-growth effect given that retained earnings is a key part of the book value of equity. Earnings quality reflects the effects of managerial discretion on reported earnings, which has been shown to be associated with both risk and behavioral biases in asset pricing. Our results affirm the existence of a value premium and show that the value premium is more pronounced within poor earnings quality stocks. Moreover, we find that poor earnings quality contributes to the value premium mainly through the pricing of growth stocks. Our results suggest that the quality of reported earnings has an incremental role in shaping expected returns of value versus growth stocks.

Keywords : value premium; earnings quality; earnings management; asset pricing
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Multinational Finance Journal, 2019, vol. 23, no. 1/2, pp. 1-36
Fatima Faruqi , Air University, Pakistan
Tanveer Ahsan , Rennes School of Business, France    Corresponding Author
Sultan Sikandar Mirza , Zhejiang Gongshang University, China
Zia-ur-Rehman Rao , Forman Christian College, Pakistan

Abstract:
The purpose of the study is to investigate the impact of corporate governance on bank performance and the mediating role of cash flows between corporate governance and bank performance in developed and developing countries. The study collects data for 2006-2015 for 30 commercial banks operating in five countries (Bangladesh, Malaysia, Pakistan, Australia, and the USA) and applies bank, time (year), and country fixed effects regression analysis to determine the direct impact of corporate governance and cash flows on bank performance. Structural equation modeling is employed to investigate the mediating role of cash flows between corporate governance and bank performance. The results suggest that the impact of corporate governance on bank performance is more significant in developed countries than in developing countries. The results also show that investment cash flows mediate the relationship between corporate governance and bank performance in developed as well as developing countries, while operating cash flows mediate the relationship between bank performance and corporate governance in developing countries only.

Keywords : corporate governance; cash flows; bank performance; panel data
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Multinational Finance Journal, 2019, vol. 23, no. 1/2, pp. 37-64
Lan T.P. Nguyen , Multinational University, Malaysia    Corresponding Author
Malick O. Sy , Royal Melbourne Institute of Technology (RMIT), Australia
Cheng M. Yu , Universiti Tunku Abdul Rahman (UTAR), Malaysia
Sayed Hossain , Cedar Valley College, USA
Tan B. Chen , Multimedia University, Malaysia

Abstract:
This study aims to examine whether long/short funds of hedge funds truly provide better diversification benefits to hedge fund investors as compared to efficient portfolios of long/short hedge funds in North America, Europe, and Asia Pacific. Data of long/short hedge funds and long/short FOHFs are obtained from Eurekahedge databases from 1st January 2008 to 31st December 2016. Mean-variance optimization method is employed to construct efficient portfolios of 100 long/short hedge funds with highest Sharpe ratios for each of the selected regions. To ensure the robustness of our findings, two rolling windows of observation are set up for a comparative analysis. This study concludes that most of the single-region focused long/short FOHFs in the sample, did not outperform the constructed efficient portfolios of long/short hedge funds investing in the same region. In fact, many long/short FOHFs did not survive more than a period of six years as observed in this study.

Keywords : funds of hedge funds; long/short strategy; diversification; efficient portfolios; mean-variance method
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Multinational Finance Journal, 2019, vol. 23, no. 1/2, pp. 65-102
Abdul-Rahman Khokhar , Saint Mary’s University, Canada    Corresponding Author

Abstract:
This study empirically compares the working capital investment of industrial firms and finds that Canadian firms invest less in working capital than their U.S. counterparts. Matched samples of 8,628 firm-year observations each from Canada and the U.S. are utilized covering the period 1988 to 2016. Compared to their U.S. counterparts, Canadian firms have a significantly lower cash conversion cycle, non-cash working capital to asset ratio and non-cash working capital to sales ratio. The difference in working capital investment is robust to variety of firm, industry and country controls as well as to year and industry fixed effects. The study also investigates the determinants of the lower investment in working capital by Canadian firms and finds that working capital investment is negatively moderated by short-term interest rates and positively associated with international operations.

Keywords : working capital management; cash conversion cycle; working capital investment; short-term financial policies
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