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Volume 23, Numbers 3 & 4 / September/December 2019 , Pages 141-272
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

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. 3/4, pp. 169-210
Vasiliki Athanasakou , Saint Mary’s University, Canada
George Athanassakos , University of Western Ontario, Canada    Corresponding Author

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. 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

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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