• Journal of Financial Regulation and Compliance

Publisher:
Emerald Group Publishing Limited
Publication date:
2011-12-21
ISBN:
1358-1988

Latest documents

  • The effect of the JOBS act on analyst coverage of emerging growth companies

    Purpose
 The purpose of this paper is to examine the section of the Jumpstart Our Business Startups (JOBS) Act related to information dissemination by sell-side security analysts. The paper analyzes how the abolishment of the quiet period requirements for emerging growth companies (EGCs) changes the analyst initiation timing and market expectation of and reaction to the issuance of the analyst recommendations.
 Design/methodology/approach
 This paper considers the effect of the abolishment of the quiet period requirements on analyst coverage initiations for EGCs with IPOs between January 2006 and December 2015 using regression analyses and probability models.
 Findings
 The results confirm the current anecdotal and empirical evidence that a shorter, de facto, quiet period exists. Analyst issue stronger average ratings for EGCs than for similar firms with IPOs before the JOBS Act. EGCs with initiations from multiple analysts also experience stronger positive market reaction than the firms with initial offerings before the JOBS Act. The market seems to anticipate which EGCs will have initiations and particularly which EGCs will have initiations from multiple analysts. The investors, however, do not fully anticipate the strength of actual recommendations.
 Practical implications
 This paper is important for researchers, practitioners and policy-makers to understand how analysts impact the financial markets, how timing of analyst initiations affects stock prices of EGCs and what firm characteristics play a role in securing analyst coverage shortly after initial offerings.
 Originality/value
 This paper adds to the emerging literature on consequences of and changes brought by the JOBS Act. Specifically, this paper extends the limited literature on analyst initiations issued for firms with IPOs following the JOBS Act, timing of those initiations and magnitude of the market’s response to the initiations.

  • Compensation clawback policies and corporate lawsuits

    Purpose
 The purpose of this paper is to study the relation between compensation clawbacks and lawsuits and analyze how these two corporate disciplinary forces interact. This paper hypothesizes that by allowing firms to recoup compensation from managers who breach their fiduciary duty, clawbacks provide a form of discipline that potentially reduces the likelihood of managerial wrongdoing, which, in turn, lowers the risk of corporate lawsuits.
 Design/methodology/approach
 This paper identifies whether or not a company in the S&P 1500 had a clawback policy between 2007 and 2014 by searching the company filings and press releases. The authors also construct different proxies for litigation risk and lawsuit outcomes using the Audit Analytics Database. They then perform a variety of empirical tests to examine the association between clawbacks and litigation risk and the association between clawbacks and litigation outcomes.
 Findings
 This paper finds that firms with higher litigation risk are more likely to adopt a clawback policy. In addition, after the adoption of clawback provisions, litigation risk significantly declines, suggesting that clawback policies are effective in reducing the likelihood of corporate lawsuits. Furthermore, firms with clawback policies are approximately 50 per cent more likely to have lawsuits against them dismissed or settled for lower amounts (approximately 12 per cent lower).
 Practical implications
 The findings of this paper provide insights to the efficacy of a current change in compensation regulation, the mandatory clawback adoption requirement by the Dodd-Frank Act of 2010.
 Originality/value
 This paper contributes to the literature on both clawbacks and litigation, as it is the first to analyze the relation between the two.

  • Valuation of defined benefit pension schemes in IAS 19 employee benefits - true and fair?

    Purpose
 This paper aims to argue that the accounting standards’ requirements for the valuation of defined benefit pension schemes in the financial statements of scheme sponsoring companies potentially produce an artificial result which is at odds with the “faithful representation” and “relevance” objectives of these standards.
 Design/methodology/approach
 The approach is a theoretical analysis of the relevant reporting standards with the use of a practical example to demonstrate the impact where trustees adopt a hedged approach to portfolio investment.
 Findings
 Where a pension fund engages in asset liability matching and invests in “risk-free” assets, the term, quantity and duration/maturity of which is intended to match some or all of its scheme liabilities, the required accounting treatment potentially results in the sponsoring company’s financial statements reporting fluctuating surpluses or deficits each year which are potentially ill informed and misleading.
 Originality/value
 Pension scheme surpluses or deficits reported in the financial statements of listed companies are potentially very significant numbers; however, the dangers posed by theoretical nature of the calculation have largely gone unreported.

  • MiFID II key concerns

    Purpose
 This paper aims to discuss key concerns surrounding the recent implementation of the Markets in Financial Instruments Directive (MIFID II). It focuses on the UK regime. The insights derived are envisaged to be helpful guides for participants and regulators in financial markets.
 Design/methodology/approach
 This paper used the legal-economics perspective. It relied on primary data from statutes and regulations and secondary data from the public domain to analyze the phenomenon. The analytical framework comprised the following sections: Introduction, MiFID I review, MiFID II scope, MiFID II key concerns and concluding remarks.
 Findings
 Only half of the EU Member States including the UK managed to transpose MiFID II within the 3rd January 2018 effective date. At this early stage of implementation, various teething problems were encountered. These pertained to costs and charges reporting, firm governance, product governance, transaction reporting, best execution and research. Owing to the sheer scale and complexity of MIFID II, most entities barely coped with their reporting obligations. Noting the situation, the Financial Conduct Authority assured firms taking all sufficient steps that they would be treated fairly.
 Research limitations/implications
 The paper was not sufficiently empirical. However, the study benefited reasonably from triangulation of data and perspectives to provide good insights on the implementation effects of the complex and voluminous EU rules for governing financial markets with global implications.
 Practical implications
 Investors could gain from the enhanced transparency and best execution rules. Investment banks could gain from the emerging resilient, integrated and efficient financial markets. Regulators with better access to more and higher quality reporting could intervene more effectively when required.
 Originality/value
 This paper assembled and critically analyzed currently available research insights in these areas so as to provide useful guidance to those needing to work and comply with MiFID II rules and academics teaching financial services law.

  • Can BRICS and ASEAN-5 emerging economies benefit from bank diversification?

    Purpose
 This paper aims to empirically investigate the impact of bank diversification on performance and risk-taking behavior. The analysis uses an unbalanced panel data set covering the period between 2007 and 2015 for a total of 1,397 banks from ASEAN-5 and BRICS economies.
 Design/methodology/approach
 Dynamic panel generalized method of moments (GMM) has been used primarily to examine the relationship between bank diversification on performance and risk-taking and later, validate the core results by incorporating two-stage least squares (2SLS).
 Findings
 Similar to the results of previous studies based on the developed economy, this study also confirms the hypothesis of the portfolio diversification. The key robust result is that the benefits from revenue and assets diversification are heterogeneous and the BRICS banks achieve higher benefit from using both diversification strategies. On the other hand, ASEAN-5 banks fail to show the significant advantage from assets diversification. Among the diverse sources of income, interest is not a major determinant of efficiency and bank’s stability, while ASEAN-5 banks should foster commission and others income as mechanisms for diversification benefit in the region.
 Originality/value
 A few studies are available in the current literature which examines the impact of revenue and assets diversification on either bank performance or risk-taking in the developed economy’s context. However, very few studies are found that examine the relationship between bank diversification, performance and risk-taking together. Moreover, to the best of the author’s knowledge, there is a dearth of literature on this topic that built on the comparative analysis between two regions, i.e. ASEAN-5 and BRICS. As a result, the empirical results of this research provide useful information to the stakeholders so that they can enhance bank diversification strategy and implement them successfully by considering the other factors.

  • Recent trends in money laundering and terrorism financing

    Purpose
 This paper aims to investigate how criminals launder money and finance terrorism through the financial system.
 Design/methodology/approach
 In total, 70 interviews were conducted with criminals and white-collar crime prevention experts, whose responses were subjected to qualitative content analysis. Based on the findings, a quantitative survey of 200 compliance officers was carried out.
 Findings
 The interviews and survey revealed concrete techniques of laundering money and financing terrorism through the financial services industry and its affiliates. Evidently, the compliance mechanisms aimed at preventing money laundering and terrorism financing can be easily circumvented.
 Research limitations/implications
 This study’s findings are limited to the perspectives of 70 interviewees. Hence, it is possible that a study with a larger sample conducted in different countries or at a different time could have yielded different results.
 Practical implications
 Identifying the concrete methods of laundering money and financing terrorism should provide both compliance officers and legislators with valuable insights into criminal activity. By better understanding the specific steps taken by criminals, compliance officers should be able to more effectively combat both money laundering and terrorism financing.
 Originality/value
 While prior literature focuses on the organizations and mechanisms involved in combating money laundering and terrorism financing, this paper instead explores how criminals avoid detection by taking into account existing compliance mechanisms and criminal perspectives.

  • Global financial regulation in the “New International Economic Order”. The unfulfilled promise of equitable economic governance

    Purpose
 In 1974, the UN General Assembly adopted a landmark resolution proclaiming the establishment of a New International Economic Order. One of the basic aims of this declaration was to enhance the voice and participation of developing countries in the international economic decision-making process based on norms of equitable governance. More than four decades have passed since its adoption. This paper aims to reflect on the past 43 years of the global financial regulatory system in light of the notion of equitable governance as envisioned by the “New International Economic Order”.
 Design/methodology/approach
 This paper surveys the global financial regulatory system from the vantage point of equitable economic governance. This discussion covers the period that comes after the 1974 UN landmark resolutions that declare the establishment of a “New International Economic Order”. The authors use qualitative and quantitative approach in this study. They use descriptive statistics and intuitive discussions of certain cases to carry the objective of the paper forward.
 Findings
 First, part of the development in global financial regulation manifests the establishment of informal networks that embark on global regulatory issues, while being very exclusive in their membership policies. Second, the lack of full and effective participation of developing countries in the decision-making and norm setting remains unsolved in the global financial regulatory system. Third, the shadow role of the World Bank and International Monetary Fund was of great significance in assisting the implementation of non-binding regulatory rules of international finance in developing countries despite the concerns of legitimacy and equity in the making of international standards. In sum, the global financial regulatory system that emerged in the past four decades is quite different from that aspired by the NIEO.
 Originality/value
 The declaration of NIEO coincides with the collapse of the Bretton Wood’s fixed exchange rate which in turn leads to the emergence of a new financial system and regulatory development. This period marked the proliferation of informal networks that make policy recommendations or non-binding rules with global implications. As far as the literature review goes far, this paper is the first to survey the post Bretton Wood’s period of the global financial regulatory architecture based on the tenets of the “New International Economic Order”.

  • Freedom, competition and bank profitability in Sub-Saharan Africa

    Purpose
 This paper aims to examine the effects of financial freedom and competition on bank profitability.
 Design/methodology/approach
 The study uses system generalized method of moments and data from 139 banks across 11 Sub-Saharan African countries during the period 2006-2012.
 Findings
 The results of the study show that higher market power (less competition) is positively related to bank profitability, but operating efficiency is a more important determinant of profitability than market power. Also, both financial freedom and economic freedom show a positive impact on bank profits. The authors find evidence that banks with higher market power operating in countries with higher freedom for banking activities are more profitable than their counterparts in countries with greater restrictions on banking activities.
 Practical implications
 The results have shown that allowing banks greater freedom to operate would enhance their performance, without necessarily damaging the economy, as operating efficiency appears to be a more important reason for the observed profitability than market power.
 Originality/value
 This study provides insight on the ambiguous relationship between competition and bank profitability by considering the moderating effect of financial freedom which has not been taken into account in previous studies.

  • Analysis on corporate governance compliance standards in New Zealand – a qualitative study on disclosures using content analysis and interviews

    Purpose
 This paper aims to provide more insights into the standard of corporate governance in New Zealand. The study intends to uncover how a small country with a well-developed economy with a good system of law and order, good institutional set up and law enforcements and implements the principles contained in the FMA’s corporate governance guidelines in practice.
 Design/methodology/approach
 The study is a mixed study one where it employs case study content analysis and augmented by conducting interviews. Large companies are selected to ascertain the level of compliance of NZ companies towards their obligations to report on corporate governance practices within the organisation. At the first stage, the study uses content analysis and looks at contents of company annual reports and publications on websites to determine whether they had disclosed as intended by New Zealand’s corporate governance guidelines.
 Findings
 The study found that a high compliance was recorded in areas such as board composition and board committees and low compliance recorded in areas involving costly implementation or when the issue is sensitive such as disclosures regarding remuneration details of directors and what non-audit work was undertaken and whether it compromises auditor independence. Being a small country, NZ has performed well in attracting foreign investment due to its strong tradition of law enforcement and respect for regulations. With greater awareness of the importance of corporate governance to investors, companies may see the benefit of greater compliance with the corporate governance guidelines. This is in line with the stakeholder theory and resource dependency theory where companies will voluntarily disclose information on corporate governance, social and environmental performance over and above mandatory requirements to appease and manage their stakeholders.
 Research limitations/implications
 The sample size of this study represents 3 per cent of total listed companies in New Zealand, but the sample is approximately 10 per cent of local NZ listed companies (i.e. not dual listed in Australia). There are 36 large companies in the New Zealand stock market with market capitalisation of 1 billion and above. In addition, the companies selected for this study are well-known in New Zealand, and it is acknowledged that this can be a source of bias in my analysis.
 Practical implications
 As was revealed during the interviews with company’s senior officials, Australian companies have achieved a higher level of compliance with the code of corporate governance. In this regard, New Zealand will have to step up and follow Australia’s lead to ensure greater compliance with the New Zealand corporate governance principles and guidelines. It would be in the best interest of the company’s stakeholders if full compliance is achieved.
 Originality/value
 Studies on the level of compliance by New Zealand companies on their obligations to meet the full extent of disclosures as stipulated by the New Zealand corporate governance guidelines are rare. This study aims to ascertain the standard of corporate governance reporting in New Zealand and the company’s seriousness to comply or attempt to meet the requirements in the seven stipulated principles.

  • The EU market abuse regulation, where does it leave us?

    Purpose
 The purpose of this paper is to provide an analysis of the market abuse regulation to determine whether the general assumption that it has made little difference to the pre-existing UK law on market abuse is accurate. In particular, the potential impact on compliance and behaviour in financial services firms and those who potentially receive inside information is considered.
 Design/methodology/approach
 The methodology adopted is a combination of critical analysis and black letter law utilised to determine the content and potential impact of the market abuse regulation. A process of discovery made more important by the limited assistance given by the European Securities and Markets Authority and the Financial Conduct Authority in terms of the guidance and definitions they have provided.
 Findings
 The new Regulation has a wider definition of insider dealing than under the previous law, has a wider application in terms of the financial instruments that it applies to, has triggered significant new compliance and disclosure requirements and it also extends the law to new markets.
 Research limitations/implications
 There are limitations in that the relevant regulatory bodies, ESMA and the FCA have made little effort to clarify how they interpret the new Regulation. This is a serious problem because in the case of the FCA, their view will impact on the approach they will take in future enforcement actions.
 Practical implications
 This paper provides the first real analysis of the market abuse regulation’s effect and shows that, if carefully analysed in context, it has a significant impact on firms in the financial services sector and those engaged in activities which can put them in receipt of inside information. It will cause an increase in relevant compliance and has significant cost implications for affected firms.
 Social implications
 This is not really relevant here. There will be necessary changes to compliance procedures.
 Originality/value
 The originality stems from the fact that there appears to be little else published which has engaged in a sustained analysis of the impact and effect of the EU market abuse regulation on the UK’s financial markets and those other firms who receive inside information.

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